1. Module 6 Costing, assessing and selecting options and measures
Country-led environmental and climate change mainstreaming

2. Linking policy, costing and budgeting
Mainstreaming of environment and climate change in policies, strategies & programmes
Identification of environmental integration and climate change adaption & mitigation options
Costing, assessment and selection of options
Resource allocation: Integration of environmental and climate change (adaptation & mitigation) measures in budgets

3. Tools for costing and assessing environmental and climate change options

4. Infrastructure measures
Common types of costs
e.g. removal of subsidies
costs e.g. training, recruitment, …
Reform measures
Transitional costs
e.g. protected areas
costs e.g. salaries, recurrent costs…
Management measures
Operational costs
e.g. sanitation facilities
costs e.g. construction, ongoing operations…
Infrastructure measures
Capital costs

5. Valuing the environment: stated-preference methods
Stated-preference approaches
Contingent valuation
Asking respondents how they would behave if a ‘market’ existed: ‘Willingness to Pay’ (WTP) and ‘Willingness to Accept Compensation’ (WTA)
Choice experiment method
Questionnaire based on choice over pairs of attributes
Responses analysed with statistical model

6. Valuing the environment: other approaches
Revealed-preference approaches
Hedonic pricing method
Relationship between housing market prices and environmental attributes
Production-function approaches
Environment valued as an input to the production of a market-valued good or service, e.g. effects of increased ozone on agricultural crops
Ecosystem service valuation models

7. Many services are public goods
Fiber
Food
Spiritual & religious
Freshwater
Genetic Resources
Climate regulation
Water purification
Disease regulation
Flood/Fire regulation
Recreation & tourism
Aesthetic
Economic Value ($)
Economic Valuation
Difficult or impossible
Easy ?
Classical economy
Source: Based on Mayaux (2006)
Environmental economy
The economic value of some environmental services can be relatively easy to calculate using classical economy models, e.g. the market value of timber, fiber, fish catches. Economic valuation of other services is more difficult to calculate and use is made of environmental economy models, e.g. to calculate the economic value of wetlands for water purification, or mangroves for coastal protection. Ecosystem services such as spiritual/religious and aesthetic are more difficult to capture through economic valuation models.

8. Cost-benefit analysis: identifying costs and benefits
Environmental and CC adaptation/
mitigation measures
Costs: extra costs incurred compared with the ‘business-as-usual’ scenario, reduced economic growth opportunities
Can you think of some examples?
Benefits:
Avoided damage and losses
Extra developmental benefits compared with ‘business-as-usual’ scenario
Energy cost savings
Sales of carbon credits
Positive environmental and related health/livelihoods outcomes (including health expenditures savings)
Strategic and competitive advantage (e.g. organic products)
Niang-Diop & Bosch (2004): costing requires identification, quantification then valuation.
The costs potentially associated with climate mitigation include:
* investment in new technologies and infrastructure, possibly more expensive than other, more emission-intensive available options;
* in some cases, increased operation & maintenance costs associated with new technologies/infrastructure (however, the opposite may be true);
* reduced economic growth opportunities, and the foregone benefits and jobs of development options abandoned or downscaled for the purpose of reducing emissions.
On the other hand, the following benefits may arise from the adoption of mitigation measures:
* cost savings (e.g. from energy efficiency);
* positive environmental outcomes (where mitigation options are also ‘greener’ than alternatives) and associated health outcomes;
* reduced dependence on imported fuels/energy;
* earlier adoption of the technologies of the future (=> competitive advantage and higher growth and employment in the medium- to long-term);
access to additional financial resources (carbon finance).
When costing environmental measures, CBA can act as a double-edged knife. For it to be effective it must internalise external costs which are often not monetised (e.g. effects on health, value of scenic beauty, potential value of genetic resources, cultural values, etc.)….often in light of complexities involved, these externalities are ignored, and thus results of CBAs are not realistic and result in an appreciation in detriment of the environment. Finding expertise in such assessments is also a big challenge.
For example, the question ‘how much are you willing to pay so your sources of water remains clean?’ Is based on an underlying assumption that the user does not have the right to clean water, whilst the polluter has a right to pollute.
Even reversing the question (e.g. ‘how much are you willing to receive in compensation if the water becomes polluted?’) does not solve the dilemma, as it still neglects the right to a clean environment. Under conditions of extreme poverty, people may be willing to give up clean water in exchange for basic subsistence.
It also becomes more complicated when attempting to cost potential value, e.g. value of genetic resource pool for potential future production of medicines…
Large expertise in environmental economics is difficult to come across.
For environmental measures, internalisation of externalities is a MUST, but can often be complex to achieve
[risk of simplification in detriment of environment]

9. 1987 1999 Mangrove Conversion $4000 Coastal Protection (~$3,840) $2000
Value
(per hectare)
$2000
$4000
Mangrove
Shrimp Farm
Coastal Protection (~$3,840)
Private Net Present Value per hectare
Mangrove: $91
Shrimp Farm: $2000
Public Net Present Value per hectare
Mangrove: $1,000 to $3,600
Shrimp Farm: $-5,400 to $200
1999
1987
Less subsidies (-$1,700)
Net: $2,000 (Gross $17,900 less costs of $15,900)
From MA State and Trends Box Data from the study by Sathirathai, S. and E. Barbier Valuing mangrove conservation in Southern Thailand. Contemporary Economic Policy 19 (2):
Fishery nursery ($70)
Source: UNEP
Timber and Non-timber products ($90)
Mangrove Conversion
Pollution Costs (-$230)
Restoration (-$8,240)
Source: Millennium Ecosystem Assessment; Sathirathai and Barbier 2001

10. Cost-benefit analysis (1)
Cost-benefit analysis (CBA):
Quantifies all the costs and benefits (*) of an intervention (with benefits including both ‘positive’ benefits and avoided losses) over the entire lifetime of the intervention
A ‘discount rate’ is applied to all costs and benefits to represent ‘preference for the present’ or simply the opportunity cost of capital -> calculation of ‘present value’
The higher the discount rate, the smaller the present value
The further away in the future, the smaller the present value
Significant controversies over the ‘right’ discount rate for assessing long-term options
(*) Actually the ‘incremental’ costs and benefits, i.e. the difference in costs/benefits between a ‘with intervention’ and a ‘no intervention’ scenario

11. Cost-benefit analysis (2)
Outputs of cost-benefit analysis:
Cost-benefit ratio (CBR)
Ratio of costs to benefits calculated at their present value (the smaller, the better – should be <1)
Net present value (NPV)
Benefits minus costs calculated at their present value (the larger, the better)
Internal rate of return (IRR)
The discount rate at which NPV = 0
A measure of the ‘benefit-generating power’ of the option or intervention (the larger, the better)

12. CBA example: wind farm (1)
Small-scale wind farm in scenic area
Initial construction costs: $750,000
Construction time: 1 year
Annual maintenance costs: $5,000
Life-span on project: 15 years
Dismantling and site restoration costs: $35,000
Market value of electricity produced: $150,000/yr
Results of contingent valuation study (visual impact):
Mean annual compensation demanded: $25/household
2,000 households affected
Discount factor: 6%
Annual costs: $55,000 ($25 x $5000)
Source: Hanley et al (2013)

13. Present value of benefits ($) Present value of costs ($)
Year
Discount factor (1.06)-t
Benefits ($)
Present value of benefits ($)
Costs ($)
Present value of costs ($) 1
750,000
0.9433
150,000
141,495
55,000
51,881 2
0.8899
133,485
48,944 3
0.8396
125,940
46,178 4
0.7921
118,815
43,565 5
0.7472
112,080
41,096 6
0.7049
105,735
38,769 7
0.6650
99,750
36,575 8
0.6274
94,110
34,507 9
0.5918
88,770
32,549 10
0.5583
83,745
30,706 11
0.5267
79,005
28,968 12
0.4969
74,535
27,329 13
0.4688
70,320
25,784 14
0.4423
66,345
24,326 15
0.4172
35,000
14,602
Total discounted benefits/costs
1,394,130
1,275,779
Source: Hanley et al (2013)

14. Cost-effectiveness analysis
Costs valued in monetary terms, and benefits quantified in ‘physical’ units over the entire lifetime of the intervention; a discount rate is applied to both
Allows calculating unit costs, as the ratio of total discounted costs to total discounted benefits obtained
The obtained unit costs support:
comparison of several options
comparison with ‘benchmark costs’ for similar interventions
CEA suitable where difficult to assign monetary value to benefits
But requires identifying a single, all-encompassing measure of benefits

15. Illustration of CEA: Global GHG abatement cost curve
Summarises technical options for reducing GHG emissions in 3 areas:
* energy efficiency;
* low-carbon energy supply;
* terrestrial carbon (avoided emissions/sinks).
Options are ranked from the least expensive (per tonne of CO2e abated) to the most expensive.
* The cost range is from –90€ to +60€ / tCO2e.
* All options with a negative cost are ‘no-regret’ since the savings they generate are greater than their costs.
The width of the bar corresponding to each option indicates the abatement potential of this option (in gigatonne CO2e per year), compared with ‘business-as-usual’, if implemented at full potential.
The curve shows that emissions ~11 Gt CO2e/year could be avoided only by implementing options that provide a net financial benefit.
Reducing emissions just enough to contain global warming below 2°C could cost only € billion/year until 2030, i.e. <1% of global GDP.
Source: McKinsey (2009), Exhibit 8, p. 17

16. Example: land-based mitigation options
Typically cost-effective and requiring low upfront investment
Significant mitigation potential for developing countries
Atmosphere
CO2
CO2
CH4
N2O
Forests
Net sink (tree biomass + soil organic matter)
Peatlands
Largest & most efficient terrestrial store of carbon biomass
Grasslands
Net carbon sink if not degraded
Cultivated systems
Both a sink and a source of GHGs, net balance depends on cultivation methods
Curbing deforestation is considered one of the most cost-effective ways of reducing GHG emissions. So is the conservation and restoration of peatlands.
According to McKinsey (2009):
*approx. 33% of total potential for reducing GHG emissions at a cost not exceeding €60 per tCO2e is related to land use (forestry and agriculture)
*90% of the abatement opportunities associated with these sectors are located in developing countries
*agriculture- and forestry-related measures generally have low capital intensity (i.e. do not require particularly high extra upfront investment), while also entailing low (sometimes negative) abatement costs
Improved ecosystem management also supports adaptation

17. Financial and economic analysis
Basis for private sector decision making
Financial and economic analysis
Both CBA and CEA support:
financial analysis: considers the ‘monetary’ costs and benefits (or equivalent) accruing to parties directly concerned by a project or programme, at their ‘face value’
economic analysis: broadens the analysis to more accurately reflect costs and benefits to society
Basis for public sector decision making

18. Complementary tools
For the assessment of robustness and the integration of uncertainty, CBA/CEA can be combined with:
the use of multiple scenarios (e.g. ‘no change’ scenario and various climate change and development scenarios)
sensitivity analysis (i.e. testing of the effect of changes in scenario assumptions on the CBR, NPV, IRR or unit costs)
risk analysis (-> risk probability analysis includes the probability of occurrence of various cost and benefit outcomes in calculations... assuming probabilities are known)
More sophisticated tools exist but they usually include CBA/CEA approaches.
CBA/CEA both support the prioritisation and selection of measures that offer the best ‘value for money’ – a key aspect in situations of budgetary constraints.
CBA/CEA support the financial and economic assessment of adaptation options; other types of assessment (e.g. technical, social, environmental) may be required to fully inform decision makers.

19. Tools for prioritising and selecting measures

20. Supporting decision making
CBA/CEA support the financial and economic assessment of options
They help identify measures that offer the best ‘value for money’ – a key aspect in situations of budgetary constraints
Other types of assessment and other criteria (e.g. technical, social, environmental) are required to fully inform decision makers
Must take into account pro-poor implications
Multi-criteria analysis (MCA) helps integrate various criteria

21. Multi-criteria analysis (1)
An approach to decision support that uses more than one criterion to assess performance and rank various options or interventions
The term actually covers a wide range of methods
Typically:
various options or interventions are assessed against a pre-determined set of criteria
qualitative ratings or quantitative scores are given
rules are then applied to rank options/interventions
Numerical scores can be added up to calculate a total score (with the possibility of applying different weights to different criteria)

22. Multi-criteria analysis (2)
MCA is a useful complement to CBA/CEA
Allows combining financial/economic criteria with technical, environmental and social ones
It can be used on its own, or in combination with CBA/CEA:
Allows reducing the number of options to which CBA/CEA is applied
MCA before CBA/CEA
MCA after CBA/CEA
CBA/CEA helps eliminate financially or economically unviable options, then MCA allows for final selection based on extra criteria

23. Multi-criteria analysis: example
How to analyse environmental consequences of integrated farming vs organic farming
Possible criteria:
Emissions of NH3 at air causing acidification
Losses of NO3- causing groundwater pollution
Losses of biocides causing toxicity issues
Potatoes (hypothetical ex)
Nitrates
(kg/yr)
Ammonia
Biocides
Integrated farming
4.1
0.4
Organic farming
5.3
1.0
We need weighing and criteria to make a decision!
Source: Kroeze and Fortuin (nd)

24. Multi-criteria analysis: example (2)
Criteria have different dimensions
e.g. cost, deposition levels, area of damage
Criteria differ in weight
e.g. critical loads for acidification may be exceeded to a larger extent than targets for eutrophication
Weights depend on ‘vision’
e.g. some problems may be prioritised over others
Qualitative and quantitative information
Source: Kroeze and Fortuin (nd)

25. Example of MCA grid
Option
Effective-ness
Cost
Technical feasibility
Social & cultural acceptability
Env’l
impacts
Total score
Option 1
Option 2
Option 3
Option 4
Scores: from 1 (poorest performance) to 4 (highest performance). As far as cost is concerned, a scale should be established, with scores corresponding to a given cost range or cost/unit range.
Adapted from USAID (2007), Exhibit 12, p. 18

26. Example of MCA grid (2) Objective Weights Project option 1
Reducing flood damage x3 4 3 5
Reducing extension of flooded area x2
Gaining land for agriculture x1 2 -2
Maintaining groundwater level -3
Securing livelihood of fishery communities -4
Preserving biodiversity -1
Total score 1

27. Turning words into action
Costing, assessing and selecting environmental and climate change adaptation & mitigation options and measures
What can be done and what are the institutional and capacity needs in your country/sector of responsibility?

28. Recap – Key messages
Cost-benefit analysis and cost-effectiveness analysis support the identification of financially and economically viable adaptation and mitigation options/measures
Help prioritise actions based on financial/economic criteria
Multi-criteria analysis, used alone or in combination with CBA or CEA, supports the assessment and prioritisation of options based on multiple criteria
Technical, environmental and social criteria can be considered alongside financial/economic ones
Pro-poor implications must be taken into consideration when prioritising measures

29. Key references
Economics of Climate Adaptation Working Group (2009) Shaping climate-resilient development: a framework for decision-making. Climate Works Foundation, Global Environment Facility, European Commission, McKinsey & Company, The Rockfeller Foundation, Standard Chartered Bank & Swiss Re. Available from:
MDG Needs Assessment Tools:
World Bank – Economics of Adaptation to Climate Change web pages:

30. References
Hanley, N; Shogren, J and White, B (2013) Introduction to Environmental Economics. 2nd edition, Oxford University Press: Oxford.
Kroeza, C and Fortuin, K (nd) Multi Criteria Analysis. Environmental Systems Analysis presentation, Wageningen University, The Netherlands.
Mayaux, P (2006) Millennium Ecosystem Assessment: overview of findings. Institute for Environment and Sustainability, Joint Research Centre; Ispra, Italy. Presentation made at AIDCO, Brussels, 26 June, 2006 (Dejeuner su l’herbe conferences).
McKinsey & Company (2009) Pathways to a Low-Carbon Economy: Version 2 of the Global Greenhouse Gas Abatement Cost Curve. Available from:
MillenniumProject (2004) Millennium Development Goals Needs Assessment Methodology. Available online from: [Accessed 20 February 2013]
UNDP MDG Needs Assessment Tools, available from:
reduction/mdg_strategies/mdg_needs_assessmenttools/mdg_needs_assess menttools.html
USAID (2007) Adapting to Climate Variability and Change: A guidance manual for development planning. United States Agency for International Development, Washington, DC. Available from: