Building Institutional Capacity in Thailand to Design and Implement Climate Programs - Introduction to CBA

The Role of Cost-Benefit Analysis
Presentation by Dr. Benoit Laplante
Bangkok, Thailand
November 23 to 25, 2016
Session 1:
Introduction to the Nature of Cost-Benefit Analysis

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

3

4
After Paris: Adaptation is still needed
• 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.
• Global average temperature has already reached 1°C above
pre-industrial times in 2015. An additional warming
of 0.4-0.5°C is expected as a result of historical emissions.
The 1.5°C could be reached by the early 2030s.

5
Thailand INDC: “Thailand intends to reduce its greenhouse gas emissions by 20
percent from the projected business-as-usual (BAU) level by 2030. The level of
contribution could increase up to 25 percent, subject to adequate and enhanced
access to technology development and transfer, financial resources and
capacity building support (…).”
Viet Nam INDC: “With domestic resources, by 2030 Viet Nam will reduce GHG
emissions by 8% compared to BAU (…). The above-mentioned 8% contribution
could be increased to 25% if international support is received through bilateral
and multilateral cooperation (…).”
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
2030. An additional 30% emission reduction is attainable on condition that
external support is made available to Ghana.
India’s INDC: “(3) To reduce the emissions intensity of its GDP by 33 to 35% by
2030 from 2005 level; (7) To mobilize domestic and new & additional funds from
developed countries to implement the above mitigation and adaptation actions in
view of the resource required and the resource gap.”

6
• Define “emissions intensity” as the following:
• Suppose that Country X intends to reach an emissions intensity of
0.65 in 2030 (a reduction of 35%).
• Suppose that in 2005, Country X produces 1 ton of GHG and that it has
a GDP of $1 million.
• Then, for example, Country X could produce 2 tons of GHG in 2030
and still achieve the objective if GDP becomes $3.075 million or more
in 2030.
Emissions intensity =
Tons of GHG
$ million of GDP
• Then, emissions intensity of Country X in 2005 is 1.
Emissions intensity =
2 Tons of GHG
$3.075 million of GDP
= 0.65
• But GHG emissions have doubled.

7
• 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.
• Global average temperature has already reached 1°C above
pre-industrial times in 2015. An additional warming
of 0.4-0.5°C is expected as a result of historical emissions.
The 1.5°C could be reached by the early 2030s.
• The 2°C target could be reached by 2050, even if pledges are
fully implemented.
Source: Universal Ecological Fund. 2016. The Truth about Climate Change.

8

Climate change and agriculture
In general:
“The study shows that temperature and precipitation changes in
both climate scenarios will significantly lower crop yields and
production— with irrigated and rainfed wheat and irrigated rice
affected the most.”
Source: World Bank. 2010. Economics of Adaptation to Climate Change. Washington, D.C.
Scientific literature:
 Climatic Change
 Nature Climate Change
 Science
 Proceedings of the National Academy of Sciences (PNAS)

In Thailand:
In Thailand, it is reported that increasing temperature has
led to a reduction in crop yield, particularly in non-irrigated
rice. In a study conducted by ONEP in 2008, negative
impacts on corn productivity ranged from 5–44%, depending
on the location of production.
Climate change already has an impact on the sector.
Saltwater intrusion has also affected many agricultural areas in
the coastal regions of Thailand.

In Thailand:
Under the most pessimistic scenario, without adaptation or
technological improvements, rice yield potential is likely to
decline about 50% by 2100 (compared to 1990).
Source: ADB. 2009. The Economics of Climate Change in Southeast Asia: A
Regional Review. Manila.

Overwhelming message:
Crop yields will fall as a result of climate change. This may
raise prices of agricultural commodities (with adverse
impact on the poor), and endanger food security.
What to do?
Simple question:
Answer:
Not so simple.
Especially if we consider that climate change will have
impacts on many things other than agricultural productivity.
So….what is the best to use our limited resources across
sectors? How much should society invest in adaptation?

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.
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.

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.
Technically, cost-benefit analysis…
2) Summarizes all positive (benefits) and negative (costs)
impacts of a project or policy into one number.
4) Aims to provide information about the economic efficiency of a
project or policy.
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.

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.
Warning
The economic analysis informs decision-makers and policy-
makers about the economic efficiency of projects or
policies.

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 of an investment
were to show that the project should not be recommended
from an economic efficiency point of view, it does not
mean that the project will not go ahead.
Warning

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?

However:
• Good or better for whom?
• For a project proponent OR for Government OR for
society?

• 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.
Cost-benefit analysis:
• 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.
Economic, financial and fiscal 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.

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?

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.
The question is:
What is the impact of the project on Government budget?
• A fiscal analysis examines the impacts of the project on
government’s fiscal (budgetary) position.

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)?

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

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 cost-
benefit analysis to economic analysis in which one aims to
assess the impacts of the investment project or policy on
society’s welfare.

Economic (cost-benefit) analysis:
• When undertaking a cost-benefit analysis, we compare the
costs and the benefits of a proposed investment (or policy)
and ask the question:
“Is this a good project (or policy) for society?”
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 (or policy) for society?”
• 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?”

Examples:
“We must achieve net zero GHG emissions by 2050.”
“Roads must be able to withstand a 1-in-50 flood event.”
Question is: What is the least cost way of achieving these
targets?
“Agricultural productivity (yield) in Thailand must be
maintained in the future despite the projected impacts of
climate change.”

What about multi-criteria analysis?
Common statement:
“When the benefits of an investment or a policy cannot be
quantified monetarily, then a multi-criteria analysis can be used
to assess the investment or policy.”
This is not quite correct. MCA is not a substitute to cost-benefit
analysis.
MCA is always done. Decisions are always based on many
criteria. Sometimes economic efficiency is one criteria, and
sometimes it is not. Sometimes economic efficiency is very
important, and sometimes it is not so important.

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. Some are more theoretical (like textbooks), some are more
practical.

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.
Economic and financial analysis

4 pieces of economic analysis in GCF proposal:
Economic and financial analysis
• 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

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.)?
Selecting adaptation options

Impacts of SLR: South East Asia
GDP
0
5
10
15
20
25
30
35
40
Myanmar
(Burma)
Brunei
Cambodia
China
Indonesia
NorthKorea
SouthKorea
Malaysia
PapuaNew
Guinea
Philippines
Thailand
TaiwanChina
Vietnam
Impacted(%oftotalGDP)
5 meter
4 meter
3 meter
2 meter
1 meter
Source: Dasgupta, S., B. Laplante, C. Meisner, D. Wheeler and C. Yo. 2009. The Impact of Sea-
Level Rise on Developing Countries: A Comparative Analysis. Climatic Change, 93, 3, 379-388.

Country
Total
Impacted
Total
Impacted
(% of Total)
Area (km2)* 513,618 0 0
Population (103)* 62,806 0 0
GDP*
(106 US$)
378,476 0 0
Urban extent
(km2)**
27,284 0 0
Agriculture extent
(km2)**
347,615 0 0
Wetland (km2)** 32,383 0 0
SLR = 0 (m)
*Source: SEDAC.
**Calculated from grid surface.

Country
Total
Impacted
Total
Impacted
(% of Total)
Area (km2)* 513,618 1,607 0.31
Population (103)* 62,806 686 1.09
GDP*
(106 US$)
378,476 5,372 1.42
Urban extent
(km2)**
27,284 361 1.32
Agriculture extent
(km2)**
347,615 772 0.22
Wetland (km2)** 32,383 911 2.82
Inundation area
SLR = 1 (m)
*Source: SEDAC.

Country
Total
Impacted
Total
Impacted
(% of Total)
Area (km2)* 513,618 3,685 0.72
Population (103)* 62,806 1,517 2.41
GDP*
(106 US$)
378,476 10,411 2.75
Urban extent
(km2)**
27,284 964 3.53
Agriculture extent
(km2)**
347,615 2,204 0.63
Wetland (km2)** 32,383 2,062 0.37
Inundation area
SLR = 2 (m)
*Source: SEDAC.

Country
Total
Impacted
Total
Impacted
(% of Total)
Area (km2)* 513,618 7,578 1.48
Population (103)* 62,806 3,075 4.90
GDP*
(106 US$)
378,476 28,230 7.46
Urban extent
(km2)**
27,284 1,993 7.30
Agriculture extent
(km2)**
347,615 5,304 1.53
Wetland (km2)** 32,383 4,405 13.60
Inundation area
SLR = 3 (m)
*Source: SEDAC.

Country
Total
Impacted
Total
Impacted
(% of Total)
Area (km2)* 513,618 12,294 2.52
Population (103)* 62,806 5,297 8.43
GDP*
(106 US$)
378,476 61,179 16.16
Urban extent
(km2)**
27,284 3,335 12.22
Agriculture extent
(km2)**
347,615 9,895 2.85
Wetland (km2)** 32,383 7,846 24.23
Inundation area
SLR = 4 (m)
*Source: SEDAC.

Country
Total
Impacted
Total
Impacted
(% of Total)
Area (km2)* 513,618 18,498 3.60
Population (103)* 62,806 7,811 12.44
GDP*
(106 US$)
378,476 85,669 22.64
Urban extent
(km2)**
27,284 4,782 17.53
Agriculture extent
(km2)**
347,615 14,864 4.28
Wetland (km2)** 32,383 11,617 35.87
Inundation area
SLR = 5 (m)
*Source: SEDAC.

resources, etc.)?
• How much to invest in adaptation?

Net revenues
per rai
Time (as temperature
increases)
If no adaptation
available, this is the cost
of climate change.
Today Today +1 Today +2 Today +3 etc
More precisely: The cost of climate change
would be computed as the present value of
the estimated reduction in annual net
revenues.

Net revenues
per rai
increases)

Net revenues
per rai
increases)
Let’s now suppose that there is one
adaptation option possible.
??

Net revenues
per rai
increases)
Benefits of
adaptation
Net benefits of adaptation =
Benefits of adaptation (increase in net revenues
per rai) – Cost of adaptation investment

Net revenues
per rai
increases)
Benefits of
adaptation
??

Net revenues
per rai
increases)
Benefits of
adaptation
Residual
damages

Net revenues
per rai
increases)
Benefits of
adaptation
Residual
damages
Cost of climate change =
Cost of adaptation investment + Residual
damages

resources, etc.)?
• What are the costs and benefits of different adaptation
measures? Which adaptation measure to select?
• How much to invest in adaptation?
• What is the appropriate combination of soft measures (policies)
and hard measures (infrastructure)? How to account for the co-
benefits of ecosystem-based adaptation measures?

Climate-proofing investment projects
Society invests in:
• Roads, bridges, railways, ports, airports;
• Energy power plants;
• Irrigation schemes;
• Schools and hospitals;
• And many other things.
Many of these assets may be exposed and vulnerable to climate
change.
How much more should society be willing-to-pay to increase the
resilience of these assets to climate change?

http://www.adb.org/sites/de
fault/files/publication/17345
4/economic-analysis-
climate-proofing-
projects.pdf

A menu of possible decisions:
Invest
now
Be ready and invest
later if needed
Do nothing and invest
later if needed

• 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.
Invest now 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 climate-
proofing.
• This type of decisions aim to ensure that a project is climate ready.
Be ready 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.
Do nothing and invest later if:
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.

Economic (cost-benefit) analysis aims to provide
information and guide decision-making.

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