Prioritization of Climate Change Adaptation Options. The Role of Cost-Benefit Analysis

Transcription

1 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 1: Introduction to the Nature of Cost- Benefit Analysis Accra (or nearby), Ghana October 25 to 28, 2016

2 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

3 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

4 After Paris: Adaptation is still needed Global average temperature has already reached 1 C above pre-industrial times in An additional warming of C is expected as a result of historical emissions. The 1.5 C could be reached by the early 2030s. 195 countries adopted the Paris Agreement on climate change. 83% of the pledges are partially or totally conditional to the use of USD 100 billion per year in financial assistance for their implementation. Ghana s emission reduction goal is to unconditionally lower its GHG emissions by 15% relative to a business-as-usual (BAU) scenario emission of 73.95MtCO2e by An additional 30% emission reduction is attainable on condition that external support is made available to Ghana.

5 After Paris: Adaptation is still needed Global average temperature has already reached 1 C above pre-industrial times in An additional warming of C is expected as a result of historical emissions. The 1.5 C could be reached by the early 2030s. 195 countries adopted the Paris Agreement on climate change. 83% of the pledges are partially or totally conditional to the use of USD 100 billion per year in financial assistance for their implementation. If all pledges are implemented, global GHG emissions will be 33% above the level of what they should be in 2030 to stay below 2C above pre-industrial levels. The 2 C target could be reached by 2050, even if pledges are fully implemented. Source: Universal Ecological Fund The Truth about Climate Change.

6 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

7 The role of cost-benefit analysis In presence of limited resources, decision makers are left with the difficult problem of evaluating and choosing investment projects and assessing policies in a context of significant complexity and uncertainty. For this purpose, decision makers have a need for a framework which structures information in a way which makes feasible and transparent this process of evaluation and selection.

8 The role of cost-benefit analysis Cost-benefit analysis provides a means of assessing and comparing the impacts of projects and policies, even when benefits and costs occur over long time horizons. It provides a systematic means to identify, quantify, and wherever possible monetize all impacts of a project or policy (including their environmental impacts), and present these impacts as social costs and social benefits. The role of cost-benefit analysis is to provide information to the decision-maker about the costs and benefits of the project or the policy. The cost-benefit analysis informs decision-makers, does not replace them.

9 The role of cost-benefit analysis Technically, the cost-benefit analysis 1) Is a process (technique) to compare all the gains and losses resulting from a project or from a policy into a common unit of measurement. 2) Summarizes all positive (benefits) and negative (costs) aspects of a project or policy into one number. 3) The economic analysis of a project (or policy) serves as an organizing framework for stakeholders to discuss the various aspects, both positive and negative, of projects or policies. 4) Aims to provide information about the economic efficiency of a project or policy.

10 The role of cost-benefit analysis For any given project (or policy), we want to know: Is this a good project (or policy)? For any given group of projects (or policies), we want to know: Which project (or policy) is better? Given a set of options all achieving a given objective, we want to know: Which of these options is better?

11 The role of cost-benefit analysis However: Good or better for whom? For a project proponent OR for Government OR for society? How do we measure good or better? Proponent s profits OR Government budget OR society s welfare?

12 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

13 Economic, financial and fiscal analysis Cost-benefit analysis: Cost-benefit analysis has become a generic term. As its name suggests, it is an analysis which aims to compare the costs and benefits of a project or a policy. The question is: Whose costs and whose benefits? The answer to this question will determine the difference between a financial analysis, a fiscal analysis, or an economic analysis. Economists will generally equate cost-benefit analysis to economic analysis where costs and benefits to society are included in the analysis. However, project proponents also do cost-benefit analysis where costs and benefits to the project components are included in the analysis.

14 Economic, financial and fiscal analysis Financial analysis: A financial analysis is a cost-benefit analysis but where: The only stakeholder included in the analysis is the developer (or investor). The only costs included in the analysis are the costs of the project to the developer or investor. The only benefits included in the analysis are the benefits to the developer or investor. A financial analysis examines the profitability of a project for the developer of the project or for the investor; it is based on a cash-flow analysis and looks at costs paid by the investor, and revenues received by the investor. The question is: Will the project increase investors wealth?

15 Economic, financial and fiscal analysis Fiscal analysis: A fiscal analysis is a cost-benefit analysis but where: The only stakeholder included in the analysis is the Government. The only costs included in the analysis are the costs of the project to State budget. The only benefits included in the analysis are the benefits of the project to State budget. A fiscal analysis examines the impacts of the project on government s fiscal (budgetary) position. The question is: What is the impact of the project on Government budget?

16 Economic, financial and fiscal analysis Economic analysis: An economic analysis is a cost-benefit analysis but where: The stakeholder is all society, not only the developer or investor. The costs included in the analysis are all costs of the project for society resulting from all impacts. The benefits included in the analysis are all benefits of the project for society. The question is: Will this project increase society s well-being (welfare)?

17 Economic, financial and fiscal analysis Is this a good project? For investor For government For society Private sector Conduct a financial analysis or private costbenefit analysis Public sector Conduct a fiscal analysis Conduct an economic analysis or social costbenefit analysis These 3 types of analyses are very different from one another and will provide different types of information to different types of decision-makers.

18 Economic, financial and fiscal analysis Common (unfortunate) practices: Often times financial, fiscal, and economic costs and benefits are put in a same table and then added and subtracted with one another and then compared. Often times financial costs to the project developer (such as labor costs and investment costs) are treated as economic benefits to the country. In a large number of cases, project developers (when requesting tax exemptions, fee concessions, or grants) submit a financial analysis of the project not an economic analysis. While these analyses assert to demonstrate how good the project is for the country, in fact they demonstrate how good the project is for the developer.

19 Economic, financial and fiscal analysis Hence: Before conducting a cost-benefit analysis, a first key step is to ask: what type of cost-benefit analysis or whose point of view will this analysis take? Once an answer is given to the above question, then the analyst must ensure that only those costs and benefits consistent with that point of view are included in the analysis. As mentioned earlier, economists will generally equate costbenefit analysis to economic analysis in which one aims to assess the impacts of the investment project or policy on society s welfare.

20 Economic, financial and fiscal analysis For example: GIZ COST-BENEFIT ANALYSIS OF INDC ADAPTATION AND MITIGATION OPTIONS OF GHANA The Ministry of Environment, Science, Technology and Innovation put together a Technical Committee comprising representatives from Government Ministries and Agencies as well as other stakeholders to review the 20 mitigation and 11 adaptation programme actions. The Committee selected five Priority Actions (four mitigation actions and one adaptation action).

21 Economic, financial and fiscal analysis Priority 1 INDC Policy Actions Scale up renewable energy penetration by 10% by 2030 Programme of Action Scale up rooftop solar systems to 200,000 households Priority 2 Fuel diversification Fuel diversification in thermal power supply Priority 3 Priority 4 Priority 5 Scale up renewable energy penetration by 10% by 2030 Agriculture resilience building in climate vulnerable landscapes Agriculture resilience building in climate vulnerable landscape Scale-up solar mini-grid to 255 to serve an estimated 1,200 island and lakeside communities Double 10,000 ha annual reforestation/afforestation of degraded lands Promote climate smart agriculture in the savannah landscapes of Ghana

22 Economic, financial and fiscal analysis The cost-benefit analysis was conducted on these five Priority Actions. What type of cost-benefit analysis was conducted? The following Actions among the five Priority Actions show positive Net Present Values: i) Scale-up rooftop solar systems to 200,000 households; ii) Scale-up solar mini-grid to 255 serve 1,200 island and lakeside communities; and iii) Promote climate-smart agriculture in the savannah landscapes. ( ) and the positive Net Present Values clearly reflect favourable financial returns on the investments that may be made to implement them. So? What type of cost-benefit analysis was conducted? The key limitation of the cost-benefit analysis of the Actions under Ghana s INDC is the lack of disaggregated financial data on the Actions. Seems to be a financial analysis. Let see later..

23 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

24 Economic versus cost-effectiveness analysis Cost-effectiveness analysis: When undertaking a cost-effectiveness analysis, we do not ask the question: Is this a good project? Instead, we ask the question: What is the least cost way of achieving the same stream of benefits or the same objective or the same target?

25 Economic versus cost-effectiveness analysis Example: We must achieve net zero GHG emissions by Roads must be able to withstand a 1-in-50 flood event. Question is: What is the least cost way of achieving these targets?

26 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

27 Economic analysis versus EIA Economic analysis versus EIA: A key difference between a financial and economic analysis is that the economic analysis includes an economic assessment of the environmental impacts of the project or policy. But in order to undertake this economic assessment of the environmental impacts, these impacts have to be identified and where possible quantified. The purpose of EIA is precisely to identify and quantify the environmental impacts of projects. So, EIA is the crucial first step in order to undertake the economic assessment of environmental impacts.

28 Economic analysis versus EIA Environmental impact assessment Input into Economic assessment of environmental impacts Economic analysis (social cost-benefit analysis) Input into

29 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

30 Timing of the economic analysis Timing of the economic analysis Purpose of the analysis Before project During project After project Learning about the expected value of the project, and whether to go ahead or not. Yes. This is most useful. Generally not. Too late. The project has been implemented. Learning about the actual value of the project No. Have to wait for project to be implemented. To some extent. Yes. This is most useful. Learning about the expected value of other similar projects. Generally not. It may provide some information. Yes. Issue will be: How similar?

31 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

32 Cost-benefit analysis in practice Requirements to conduct CBA nature exist in numerous countries, including Australia, Canada, Philippines, and the United Kingdom among numerous others. In Asian Development Bank and World Bank All projects submitted to the Board of Management of these institutions must contain an economic analysis of the investment projects. These countries and institutions have developed guidelines to conduct economic analyses. These are freely available on the web.

33 Economic and financial analysis For Green Climate Fund: All projects must conduct economic analysis. If the project includes activities which may generate revenues (for example a water supply project), then a financial analysis must also be conducted.

34 Economic and financial analysis 4 pieces of economic analysis in GCF proposal: Section E.6.1 Cost effectiveness and efficiency A short paragraph which reports the estimated NPV. Section F.1 Economic and financial analysis A short but more detailed description of the economic analysis. Appendix XII Complete economic analysis. Excel Spreadsheet

35 Economic and financial analysis Warning Numerous criteria are used (or should be used, or must be used) to assess projects or policies, such as: The physical or biological impacts; Economic efficiency; Distributional equity; Social and cultural and religious acceptability; Operational practicality; Administrative feasibility; Legality. The economic analysis informs decision-makers and policymakers about the economic efficiency of projects or policies.

36 Economic and financial analysis Warning Economic efficiency is only one criterion used to decide whether a project should be funded or not. Other criteria are also used. Hence, even if the economic analysis could show a negative NPV, it does not mean that a project should not be supported.

37 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

38 Selecting adaptation options Provided that adaptation is still needed, then society faces a number of important questions, including: What is the cost of climate change expected to be for different sectors (e.g. agriculture, water, health, coastal resources, etc.)?

39 Selecting adaptation options Ghana: Population distribution

40 Selecting adaptation options % of land impacted (1m SLR) Sub-Saharan countries (per World Bank)

41 Selecting adaptation options % of total population impacted (1m SLR) Ghana: Approximately 220,000 people Sub-Saharan countries (per World Bank)

42 Selecting adaptation options % of urban extent impacted (1m SLR) Sub-Saharan countries (per World Bank)

43 Selecting adaptation options % of GDP impacted (1m SLR) Sub-Saharan countries (per World Bank)

44 Selecting adaptation options Provided that adaptation is still needed, then society faces a number of important questions, including: What is the cost of climate change expected to be for different sectors (e.g. agriculture, water, health, coastal resources, etc.)? How much to invest in adaptation? What are the costs and benefits of different adaptation measures? Which adaptation measure to select? What is the appropriate combination of soft measures (policies) and hard measures (infrastructure)? How to account for the cobenefits of ecosystem-based adaptation measures?

45 Outline of presentation 1) After Paris: Adaptation is still needed 2) The role of cost-benefit analysis 3) Economic, financial, and fiscal analysis 4) Economic versus cost-effectiveness analysis 5) Economic versus environmental impact analysis 6) Timing of the economic analysis 7) Cost-benefit analysis in practice 8) Selecting adaptation options 9) Climate-proofing investment projects

46 Climate-proofing investment projects A menu of possible decisions: Invest now Be ready and invest later if needed Do nothing and invest later if needed

47 Climate-proofing investment projects Invest now if: costs of climate-proofing now are relatively small while the expected benefits are estimated to be very large (a low-regret approach), and/or costs of climate-proofing at a later point are expected to be prohibitive, or climate-proofing at a later point in time is technically not possible; and/or among climate-proofing options there exist options which deliver net positive economic benefits regardless of the nature and extent of climate change, including the current climate conditions (a no-regret approach); and/or the set of climate-proofing options includes options which not only reduce project climate risks, but also have other social, environmental or economic benefits (co-benefits). The presence of co-benefits, if any, must be included in the economic analysis of adaptation options.

48 Climate-proofing investment projects Be ready and invest later if: No climate-proofing investment is needed now, but the project can be designed to accommodate climate-proofing in the future if and when circumstances indicate this to be a better option than not climateproofing. This type of decisions aim to ensure that a project is climate ready.

49 Climate-proofing investment projects Do nothing and invest later if: costs of climate-proofing now are estimated to be large relative to the expected benefits; and/or costs (in present value terms) of climate-proofing (e.g. retro-fitting) at a later point in time are expected to be no larger than climate-proofing now; and/or expected benefits of climate-proofing are estimated to be relatively small. Note: The decision to do nothing does not come from ignoring climate change, but from rationally deciding out of a technical and economic assessment that the best thing to do for now is to do nothing.

50 Role of cost-benefit analysis? GROUP DISCUSSION How do you see the role of CBA in your work? What are the barriers and constraints to the use of CBA?

51 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 1: Introduction to the Nature of Cost- Benefit Analysis Accra (or nearby), Ghana October 25 to 28, 2016

52 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 2: CBA Steps and Expertise Accra (or nearby), Ghana October 25 to 28, 2016

53 Outline of presentation 1) Economic analysis: 8 steps 2) Steps and expertise

54 Outline of presentation 1) Economic analysis: 8 steps 2) Steps and expertise

55 CBA: 8 steps Step 1: Define the scope of analysis. Step 2: Identify all potential physical impacts of the project. Step 3: Quantify the predicted impacts: With and without project Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 7: Perform expected value and/or sensitivity analysis. Step 8: Make recommendations.

56 Outline of presentation 1) Economic analysis: 8 steps 2) Steps and expertise

57 Steps and expertise IDENTIFICATION OF IMPACTS QUANTIFICATION OF IMPACTS STEPS 1, 2 and 3 ECONOMIC VALUATION OF IMPACTS STEPS 4, 5, 6, and 7 MAKE RECOMMENDATIONS STEP 8

58 Steps and expertise IDENTIFICATION OF IMPACTS QUANTIFICATION OF IMPACTS ECONOMIC VALUATION OF IMPACTS Task of technical and scientific experts Task of technical, scientific and economic experts Task of economists MAKE RECOMMENDATIONS Team task Need multi-disciplinary team

59 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 2: CBA Steps and Expertise Accra (or nearby), Ghana October 25 to 28, 2016

60 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 3: CBA Steps 1, 2, and 3 Accra (or nearby), Ghana October 25 to 28, 2016

61 8 steps Step 1: Define the scope of analysis. Step 2: Identify all potential physical impacts of the project. Step 3: Quantify the predicted impacts: With and without project Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 7: Perform expected value and/or sensitivity analysis. Step 8: Make recommendations.

62 Outline of presentation 1) Step 1 2) Step 2 3) Step 3

63 Outline of presentation 1) Step 1 2) Step 2 3) Step 3

64 8 steps Step 1: Define the scope of analysis. Step 2: Identify all potential physical impacts of the project. Step 3: Quantify the predicted impacts: With and without project Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 7: Perform expected value and/or sensitivity analysis. Step 8: Make recommendations.

65 Step 1: Define the scope of analysis Meaning: Who to include in the analysis? Whose costs and benefits will be included? Should it be local? Provincial? National? Global? This is sometimes referred as a scoping issue.

66 Step 1: Define the scope of analysis Geographical scoping How about river diversion from one country to another? How about air pollution emitted by one country and impacting another country? How about a hydro-power project in one country impacting river flow in downstream countries? How about untreated wastewater discharge from one city having an impact on water quality in another city of a different province within the same country?

67 Step 1: Define the scope of analysis Geographical scoping Mis-specifying the geographical scope of the analysis can lead to significant under-estimates of the costs and benefits of the project. There is no easy rule on how to specify correctly the geographical scope of the analysis.

68 Step 1: Define the scope of analysis In general: The geographical scope coincides with the jurisdictional area over which the implementing government has authority. A project implemented and paid for by a local government will most probably use a local scope of analysis. A project implemented and paid for by a national government will most probably use a national scope of analysis. Since multi-lateral development banks (MDBs such as World Bank) lend money to national governments, all projects financed by MDBs use a national scope when conducting economic analysis.

69 Step 1: Define the scope of analysis GROUP DISCUSSION Please consider the Tonle Sap Basin Flood Control Project 6. The proposed flood protection will also generate incremental tourism benefits. Currently, the town is receiving 5,076 foreign visitors and 16,320 local visitors. From 2013 to 2018, a 5% annual growth rate in tourism was assumed. With the project completion, an 8% annual growth rate from 2019 to 2044 was used, while the without-the-project scenario assumed a more conservative annual growth rate of 5% given other planned developments benefiting the town. Foreign visitors spend an average of $50/day and stay an average 1.5 days without the project. Local visitors spend about $25/day and stay an average of 2 days. With the project, it was estimated that foreign and local visitors will extend their stay for an average of 1 day and will spend an additional $20/day and $5/day, respectively. For conservatism, only 30% of the calculated incremental tourism benefits were attributed to the flood protection subproject. TA 7986-CAM consultant estimates based on discussions with the KCH Provincial Department of Tourism.

70 Step 1: Define the scope of analysis GROUP DISCUSSION Please consider the Tonle Sap Basin Flood Control Project. This project would receive financial support from ADB to the Government of Cambodia. In this context, please discuss whether or not it is appropriate to include tourism benefits in the economic analysis.

71 Step 1: Define the scope of analysis GROUP DISCUSSION Please consider the Anhui Sustainable Transport Project. 13. Transport externalities. The project will reduce carbon dioxide (CO2) emissions by 652,700 tons from An estimated 247,200 tons of CO2 will be emitted because of construction works. The highway upgrades will have mixed effect on emissions they will be increased by the higher speeds and added traffic that will result, but decline due to less congestion and smoother road surfaces. A net overall reduction in emissions of 137,600 tons was estimated over 20 years. The IWT component will lead to a net reduction in CO2 emissions of 762,300 tons over 30 years due to the shift from higheremission road transport to waterway transport. CO2 emissions were evaluated at a constant $25 per ton.

72 Step 1: Define the scope of analysis GROUP DISCUSSION Please consider the Anhui Sustainable Transport Project. CO2 emissions were evaluated at a constant $25 per ton, where $25 is the reported global social cost of carbon. Please discuss the use of the global social cost of carbon in the economic analysis of this investment project in China.

73 Step 1: Define the scope of analysis GROUP DISCUSSION GIZ COST-BENEFIT ANALYSIS OF INDC ADAPTATION AND MITIGATION OPTIONS OF GHANA

74 Define the scope of analysis Priority 1 INDC Policy Actions Scale up renewable energy penetration by 10% by 2030 Programme of Action Scale up rooftop solar systems to 200,000 households Priority 2 Fuel diversification Fuel diversification in thermal power supply Priority 3 Priority 4 Priority 5 Scale up renewable energy penetration by 10% by 2030 Agriculture resilience building in climate vulnerable landscapes Agriculture resilience building in climate vulnerable landscape Scale-up solar mini-grid to 255 to serve an estimated 1,200 island and lakeside communities Double 10,000 ha annual reforestation/afforestation of degraded lands Promote climate smart agriculture in the savannah landscapes of Ghana

75 Define the scope of analysis Priority 1 INDC Policy Actions Scale up renewable energy penetration by 10% by 2030 Programme of Action Scale up rooftop solar systems to 200,000 households Priority 2 Fuel diversification Fuel diversification in thermal power supply Priority 3 Priority 4 Priority 5 Scale up renewable energy penetration by 10% by 2030 Agriculture resilience building in climate vulnerable landscapes Agriculture resilience building in climate vulnerable landscape Scale-up solar mini-grid to 255 to serve an estimated 1,200 island and lakeside communities Double 10,000 ha annual reforestation/afforestation of degraded lands Promote climate smart agriculture in the savannah landscapes of Ghana

76 Define the scope of analysis Scale up rooftop solar systems to 200,000 households. The report says: Benefit 1: Job creation opportunities through installation and maintenance of solar systems Benefit 2: Reduced consumption of fossil fuel for power generation. Benefit 3: Increased electricity access to rural communities and contributed to realize energy security. Benefit 4: Saving in national electricity demand. Let s look at Benefit 2 (Reduced consumption of fossil fuel for power generation).

77 Year Define the scope of analysis ANNEX 3: RESULTS OF COST BENEFIT ANALYSIS Rooftop systems installed Cumulative CO2 reduction (kt) Savings from CO2 reduction (USD million) , , , , , , , , ,801 1, ,271 1, ,499 1, ,748 1, ,423 1, ,966 1, ,862 2,

78 Define the scope of analysis ANNEX 3: RESULTS OF COST BENEFIT ANALYSIS Year Rooftop systems installed Cumulative CO2 reduction (kt) Savings from CO2 reduction (USD million) Savings per kt of CO , , , , , , , , ,801 1, ,271 1, ,499 1, ,748 1, ,423 1, ,966 1, ,862 2,

79 Define the scope of analysis So, it would seem that the CO2 mitigation benefits of rooftop solar systems has been assessed using the global social cost of carbon. Please discuss. GROUP DISCUSSION

80 Outline of presentation 1) Step 1 2) Step 2 3) Step 3

81 8 steps Step 1: Define the scope of analysis. Step 2: Identify all potential physical impacts of the project. Step 3: Quantify the predicted impacts: With and without project Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 7: Perform expected value and/or sensitivity analysis. Step 8: Make recommendations.

82 Step 2: Identify all potential impacts Meaning: List ALL impacts of the projects, including the required inputs of the project (e.g. labor, capital, etc.), and all the outputs of the project. If the project (or the activity) is to improve access to sanitation, or to improve solid waste management, or to reduce the frequency or extent of flooding, then in order to provide an economic assessment of the potential benefits of the project, we first need to list all the impacts associated with the lack of sanitation, or the lack of proper of solid waste management, or the floods.

83 Step 2: Identify all potential impacts Difficulties: Many of the impacts may not be known; Science is incomplete and often can be contradictory. At best, the data is incomplete. At worse, it simply does not exist. Always have to make assumptions; always have to extrapolate from: Existing time series; Lessons from similar projects elsewhere; Advice of technical experts.

84 Outline of presentation 1) Step 1 2) Step 2 3) Step 3

85 8 steps Step 1: Define the scope of analysis. Step 2: Identify all potential physical impacts of the project. Step 3: Quantify the predicted impacts: With and without project Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 7: Perform expected value and/or sensitivity analysis. Step 8: Make recommendations.

86 Step 3: Quantify impacts This is perhaps the most important and most common failure in CBA.

87 Step 3: Quantify impacts Consider this example: Water sanitation project starts Implementation completed Suppose that in years prior to 1990, there were between 50 and 75 cases of gastro-intestinal diseases per month in a district of a large city in Ghana. As a result, in 1990 a water sanitation project was initiated and fully implemented by Over the period 1993 to 1995, there are between 100 and 125 cases of gastro-intestinal diseases per month in the same district. Conclusion: Therefore the project was a failure. Is this a correct conclusion? If not, why not?

88 Step 3: Quantify impacts Consider this example: Water sanitation project starts Implementation completed Suppose that in years prior to 1990, there were between 50 and 75 cases of gastro-intestinal diseases per month in a district of a large city in Ghana. As a result, in 1990 a water sanitation project was initiated and fully implemented by Over the period 1993 to 1995, there are between 10 and 25 cases of gastro-intestinal diseases per month in the same district. Conclusion: Therefore the project was a success. Is this a correct conclusion? If not, why not?

89 Step 3: Quantify impacts Suppose the following (hypothetical) situation: Suppose that fisheries in Ghana have been in decline in the last many years (perhaps as a result of over-fishing). Suppose that in Ghana, climate change is projected to have an adverse effect on fisheries (perhaps as a result of increase in water temperature or ocean acidification). GROUP DISCUSSION How would you assess the impact of climate change on fisheries in Ghana?

90 Step 3: Quantify impacts Fisheries (tons per month) We need to think: What is expected to happen to the fisheries without climate change? We need fisheries expert to say which scenario is more likely. Existing level of fisheries Past Today Looking in the future Time

91 Step 3: Quantify impacts Fisheries (tons per month) Existing level of fisheries We need to think: What is expected to happen to the fisheries with climate change? We need again our fisheries expert to say which scenario is more likely. Suppose: Expected fisheries without climate change Continue to fall but more rapidly Collapse Past Today Looking in the future Time

92 Step 3: Quantify impacts Fisheries (tons per month) The impact of climate change is NOT comparing fisheries in the past versus fisheries with CC. The impact of CC is comparing fisheries in the future with and without CC. Existing level of fisheries Expected fisheries without CC Expected fisheries with CC Impact of CC Past Today Looking in the future Time

93 Step 3: Quantify impacts Now suppose the following (hypothetical) situation: There is an adaptation measure which could reduce (partly or totally) the adverse impact of climate change on fisheries. GROUP DISCUSSION How would one assess the positive impact of this adaptation measure on fisheries?

94 Step 3: Quantify impacts Fisheries (tons per month) The impact of adaptation is comparing fisheries with CC in the future without adaptation vs with adaptation Existing level of fisheries Fisheries without climate change is not relevant in assessing the impact of adaptation. Expected fisheries with CC with adaptation Expected fisheries with CC without adaptation Impact of adaptation Past Today Looking in the future Time

95 Step 3: Quantify impacts We must always ask: What would happen if the project did not take place. We must compare how the situation will be with the project and how it is expected to be without the project.

96 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 3: CBA Steps 1, 2, and 3 Accra (or nearby), Ghana October 25 to 28, 2016

97 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 4: Using the Social Cost of Carbon in Cost-Benefit Analysis Accra (or nearby), Ghana October 25 to 28, 2016

98 Outline of presentation 1. Definition of Social Cost of Carbon (SCC) 2. Overall approach and steps in estimating the SCC 3. The role of integrated assessment models (IAMs) 4. Value of SCC in selected MDBs 5. Using national or global SCC?

99 Outline of presentation 1. Definition of Social Cost of Carbon (SCC) 2. Overall approach and steps in estimating the SCC 3. The role of integrated assessment models (IAMs) 4. Value of SCC in selected MDBs 5. Using national or global SCC?

100 Definition of SCC The SCC is an estimate of the monetized damages associated with an incremental increase in carbon emissions in a given year. It is generally measure as a $ value per ton of CO2 or per ton of CO. Simultaneously, it serves as an estimated of the gain (benefits) resulting from the mitigation of carbon (where the benefit is measured as a $ value per ton of CO2 or per ton of CO). More technically: It is the marginal external cost of a unit of emission of CO2, measured in terms of foregone consumption based upon the damages inflicted by that emission upon society through additional climate change.

101 Definition of SCC It is meant to include (but is not limited to): Impacts on net agricultural productivity Impacts on human health Impacts on property damages from increased flood risk Impacts on ecosystem services

102 Outline of presentation 1. Definition of Social Cost of Carbon (SCC) 2. Overall approach and steps in estimating the SCC 3. The role of integrated assessment models (IAMs) 4. Value of SCC in selected MDBs 5. Using national or global SCC?

103 Approach and steps in estimating the SCC Overall approach: 20 Emissions and Consumption Emissions base

104 Approach and steps in estimating the SCC Overall approach: 30 Emissions and Consumption Emissions base Consumption base

105 Approach and steps in estimating the SCC Overall approach: 30 Emissions and Consumption Emissions base Emissions + 1T Consumption base

106 Approach and steps in estimating the SCC Overall approach: 30 Emissions and Consumption Emissions base Emissions + 1T Consumption base Consumption +1T The SCC is the present value (to Year 2) of the difference between Consumption base and Consumption + 1T.

107 Approach and steps in estimating the SCC Steps: Step 1: Project a future path of GHG emissions (assumptions about population growth, GDP, technology development and adoption, etc.) Step 2: Translate this path of GHG emissions into alternate scenarios of climate change. Do the same for a projected path of GHG emissions which add 1 ton of carbon in any given year. Step 3: Estimate physical impacts of climate change on humans and ecosystems. Step 4: Monetize these impacts and discount.

108 Outline of presentation 1. Definition of Social Cost of Carbon (SCC) 2. Overall approach and steps in estimating the SCC 3. The role of integrated assessment models (IAMs) 4. Value of SCC in selected MDBs 5. Using national or global SCC?

109 Role of IAMs IAMs do all 4 steps. 3 IAMs: DICE (Dynamic Integrated Climate Change and Economy; W. Nordhaus) PAGE (Policy Analysis of the Greenhouse Effect; C. Hope) FUND (Climate Framework for Uncertainty, Negotiation, and Distribution; R. Tol) These IAMs differ in terms of: The way they transform changes in temperature into changes in consumption and investment. For example, GDP is endogenous in DICE but not PAGE and FUND. PAGE and DICE includes the possibility of catastrophes, not FUND. PAGE and FUND allows for some form of adaptation, not DICE.

110 Role of IAMs Known limitations of IAMs: Incomplete treatment of non-catastrophic impacts For example, the impacts (and costs) of ocean acidification are not included in IAMs. Incomplete treatment of potentially catastrophic impacts For example, the impacts (and costs) of massive loss of ice sheets and re-organization of ocean circulation are not included in IAMs IAMs are calibrated over a relatively narrow range of observed temperatures (around 2.5C). Very crude extrapolation of damages to higher degrees of warming. Incomplete treatment of adaptation and technological change.

111 Outline of presentation 1. Definition of Social Cost of Carbon (SCC) 2. Overall approach and steps in estimating the SCC 3. The role of integrated assessment models (IAMs) 4. Value of SCC in selected MDBs 5. Using national or global SCC?

112 Value of SCC in selected MDBs Comparison SCC used by different agencies ($/t CO2) (all measured in $2015 using GDP deflator) EIB EBRD US IWG World Bank Given the limitations of IAMs and the extent of the uncertainty, one does not find these values to be fundamentally inconsistent.

113 Outline of presentation 1. Definition of Social Cost of Carbon (SCC) 2. Overall approach and steps in estimating the SCC 3. The role of integrated assessment models (IAMs) 4. Value of SCC in selected MDBs 5. Using national or global SCC?

114 Using national or global SCC? In most instances, the population which has standing in a costbenefit analysis corresponds to the political jurisdiction that is bearing the cost of the policy or investment. In circumstances where a national government bears the cost of a policy or investment, the CBA will include national costs and benefits of the policy or investment.

115 Using national or global SCC? In the US: US government guidance (OMB 2003, Circular A-4): Your analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately. In the US: US Executive Order (of 2011): Federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people What to do with greenhouse gases?

116 Using national or global SCC? Recommendations of the Interagency Working Group on SCC: ( ) the interagency working group concluded that a global measure of the benefits from reducing U.S. emissions is preferable. (Interagency Working Group 2013) Rationale: ( ) climate change presents a problem that the US alone cannot solve. Other countries also need to take action. The US has been actively involved in seeking international agreements to reduce emissions and in encouraging other nations to take significant steps to reduce emissions. ( ) to address the global nature of the problem, the SCC must incorporate global damages caused by GHG emissions.

117 Using national or global SCC? Recommendations of the Interagency Working Group on SCC: The issue of GHG is the only case in the US where a global benefit of a proposed regulation (as opposed to a domestic benefit) is used in the cost-benefit analysis of regulatory interventions. The legality of the approach may be challenged. See Gayer, T. and W.K. Viscusi Determining the Proper Scope of Climate Change Benefits. The Brookings Institution, Washington, D.C.

118 Using national or global SCC? On July 14, 2014, the World Bank issued the following document: Social Value of Carbon in project appraisal Guidance note to the World Bank Group staff Let s examine a few excerpts.

119 Using national or global SCC? Social Value of Carbon in project appraisal Guidance note to the World Bank Group staff GHG emissions are global externalities. As such, we recommend that the economic analysis be done both with and without a social value of carbon. The analysis with the SVC is the most relevant for the WBG, given its role as a global institution; borrowing countries may however want an estimate of the domestic economic costs and benefits only.

120 Using national or global SCC? Social Value of Carbon in project appraisal Guidance note to the World Bank Group staff Cases may arise where a project is economically viable with the global (positive) externality, but not without i.e. the project domestic costs are higher than domestic benefits. In such a case, efforts may be made to find additional financing to cover incremental cost of delivering global benefits. The country may also decide to pursue the project for strategic or other reasons.

121 Using national or global SCC? Social Value of Carbon in project appraisal Guidance note to the World Bank Group staff In particular, carbon market prices appear to bear little relation with the value of climate damages or the carbon price needed to achieve a 2 C target. For this reason, we recommend against the use of carbon market prices for project evaluation at this time.

122 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 4: Using the Social Cost of Carbon in Cost-Benefit Analysis Accra (or nearby), Ghana October 25 to 28, 2016

123 Prioritization of Climate Change Adaptation Options The Role of Cost-Benefit Analysis Session 5: Conducting CBA Step 4 (Introduction to economic valuation) Accra (or nearby), Ghana October 25 to 28, 2016

124 8 steps Step 1: Define the scope of analysis. Step 2: Identify all potential physical impacts of the project. Step 3: Quantify the predicted impacts: With and without project Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 7: Perform expected value and/or sensitivity analysis. Step 8: Make recommendations.

125 8 steps Step 1: Define the scope of analysis. Step 2: Identify all potential physical impacts of the project. Step 3: Quantify the predicted impacts: With and without project Step 4: Monetize impacts. Step 5: Discount to find present value of costs and benefits. Step 6: Calculate net present value. Step 7: Perform expected value and/or sensitivity analysis. Step 8: Make recommendations.

126 Outline of presentation 1) When market prices are known Calculating the cost of input Calculating the benefit of an output 2) When market prices are not known 3) Benefit transfer methodology

127 Outline of presentation 1) When market prices are known Calculating the cost of input Calculating the benefit of an output 2) When market prices are not known 3) Benefit transfer methodology

128 Calculating the cost of an input Consider the following situation. As a result of the large number of road accidents along a winding road in Ghana, the Government of Ghana considers improving the road. Or: As a result of the projected increased electricity demand, the Government of Ghana considers increasing supply capacity by adding a new coal-fired power plant to the power supply system. Each of these projects will require 1,000 tons of steel and 1,000,000 hours of labor. We know the market price of steel and the market price of labor. But what s the economic cost of these inputs?

129 Suppose there is a tax on the input Consider the following situation: There is a tax on each unit of input going into the project. Suppose the following: QG is the quantity (tons) of steel procured by the project P1 is the market price of steel T is the tax on each ton of steel Financial cost (to project developer): Economic cost to society: (P1+T)*QG (P1+T)*QG T*QG = P1*QG Taxes are called transfer payments. Economic cost < Financial cost Transfer payments are not included in the economic analysis.

130 Treatment of transfer payments Canada (1998): In [economic] analysis, we count resources that are created or used up. Resources that are simply transferred from one pocket to another are not counted as costs or benefits. Australia (2007): Payments which redistribute income but which do not reflect either the value of a good to a consumer or the costs of its supply ( ) are excluded from a cost-benefit analysis. New Zealand (1998): A transfer payment is a payment for which no good or service is obtained in return e.g., a social welfare benefit. Transfer payments may change the distribution of wealth, but do not of themselves give rise to direct economic costs or benefits for the economy as a whole. They should therefore be excluded from CBA.

131 Suppose there is a negative externality with steel Consider the following situation: The production of steel generates water pollution. Suppose the following: QG is the quantity (tons) of steel procured by the project P1 is the market price of steel. EC is the external cost of each ton of steel produced. Suppose this external cost is not internalized in the market price of steel. Financial cost (to project developer): P1*QG Economic cost to society: (P1+EC)*QG Economic cost > Financial cost