Conducting Cost-Benefit Analysis: Steps 1 to 3 - Identify and Quantify

1. Photo credit: UNDP Climate Change Adaptation
ECONOMICS OF CLIMATE CHANGE
ADAPTATION
BLOCK 2 TRACK 2
Cost-Benefit Analysis of Investment
Projects and of Climate Change
Adaptation Investments
SESSION 3
Conducting Cost-Benefit Analysis:
Steps 1 to 3 - Identify and Quantify

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Session 3
Outline of presentation
3 Steps 1, 2 and 3
1 Economic analysis: 8 steps
2 Steps and expertise

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Session 3
Outline of presentation
3 Steps 1, 2 and 3
1 Economic analysis: 8 steps
2 Steps and expertise

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

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Session 3
Economic analysis: 8 steps
3 Steps 1, 2 and 3
1 Economic analysis: 8 steps
2 Steps and expertise

6. 6
Session 3
Steps and expertise
Make
recommendations
Identification of
impacts
Steps 1, 2 and 3
Quantification of
impacts
Economic
valuation of
impacts
Steps 4, 5, 6 and 7
Step 8

7. 7
Session 3
Steps and expertise
Make
recommendations
Identification of
impacts
Task of technical,
scientific and economic
experts
Quantification of
impacts
Economic
valuation of
impacts
Task of economists
Team task
Task of technical and
scientific experts
Need multi-disciplinary team

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Session 3
Outline of presentation
3 Steps 1, 2 and 3
1 Economic analysis: 8 steps
2 Steps and expertise

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

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

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Session 3
Steps 1: Define the scope of analysis
Meaning
Who do you include in your analysis? Whose costs and benefits?
Should it be local? Provincial? National? Global?
This is sometimes referred as a scoping issue
• Geographical scoping: Setting the boundaries / where to stop?
• Stakeholders scoping: Who has standing

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Session 3
Steps 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 (e.g. sulfur dioxide emissions from USA, or tar sand exploration in
Alberta)?
How about a hydro-power project in China impacting the flow of the
Mekong River in Thailand and Cambodia?
How about untreated wastewater discharge from Montreal city having an
impact on water quality in Quebec City?

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Session 3
Steps 1: Define the scope of analysis
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.
Good practice is to include all impacts of the project in the analysis regardless of
legal boundaries.
To inform decision-makers, it may be useful to group these impacts into those
occurring:
• Within the local community where the project is located
• On other local communities within the same state
• On other states within the country
• On other countries

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Session 3
Steps 1: Define the scope of analysis
Local community
Other local
communities within the
state
Other states within
the country
Other countries

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Session 3
Steps 1: Define the scope of analysis
Stakeholder scoping
This means: whose costs and benefits to include in the analysis?
Consider the following:
• Suppose a road improvement project in Southern B.C. Will reduce traveling
time between Vancouver and Whistler.
• Many non-nationals travel between Vancouver and Whistler.
Do non-nationals have standing in the analysis? Do we include the benefits
to them?
Again, there is no easy rule on how to answer such questions

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

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Session 3
Step 2: Identify all potential physical 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.

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Session 3
Step 2: Identify all potential physical 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:
o Existing time series
o Lessons from similar projects elsewhere
o Advice of technical experts

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

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Session 3
Step 3: Quantify the predicted impacts
This is perhaps the most important and most common failure in
cost-benefit analysis

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Session 3
Step 3: Quantify the predicted impacts
Consider this example
Conclusion: Therefore the project was a failure. Is this a correct conclusion? If not,
why not?
Over the period 1993 to 1995, there are between 100 and 125 cases of
gastrointestinal diseases per month in the same district.
Suppose that in years prior to 1990, there were between 50 and 75 cases of
gastrointestinal diseases per month in a district of a large city in SE Asia.
As a result, in 1990 a water sanitation project was initiated and fully implemented
by 1992.
1989 1990 1992 1995

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Session 3
Step 3: Quantify the predicted impacts
Conclusion: Therefore the project was a success. Is this a correct conclusion? If
not, why not?
Over the period 1993 to 1995, there are between 10 and 25 cases of
gastrointestinal diseases per month in the same district.
Suppose that in years prior to 1990, there were between 50 and 75 cases of
gastrointestinal diseases per month in a district of a large city in SE Asia.
As a result, in 1990 a water sanitation project was initiated and fully implemented
by 1992.
1989 1990 1992 1995
Water sanitation
project starts
Implementation
completed

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Session 3
Step 3: Quantify the predicted impacts
Suppose the following (hypothetical) situation:
How would one assess the impact of the project on fisheries?
Would we say: “Since fisheries is in decline anyway, then the project has no
impact.”?
In a specific region of the country, a project is going to have an adverse effect on
fisheries.
However, fisheries in this region have been in decline in the last few years
(perhaps as a result of over-fishing).

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Step 3: Quantify the predicted impacts
Fisheries
(tons per
month)
Existing level
of fisheries
Past Toda
y
TimeLooking in the future
We need to think: What is
expected to happen to the
fisheries without the project?
We need ‘fisheries expert’ to say
which scenario is more likely.

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Session 3
Step 3: Quantify the predicted impacts
Fisheries
(tons per
month)
Existing level
of fisheries
Past Toda
y
TimeLooking in the future
We need to think: What is
expected to happen to the
fisheries with the project?
We need again our ‘fisheries
expert’ to say which scenario is
more likely.
Suppose: Expected fisheries
without project (according to
‘fisheries expert’)
Continue to fall
but more rapidly
Collapse

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Session 3
Step 3: Quantify the predicted impacts
Fisheries
(tons per
month)
Existing level
of fisheries
Past Toda
y
TimeLooking in the future
The impact of the project is NOT
comparing fisheries before the
project and after the project.
The impact of the project is
comparing fisheries in the future
with and without the project.
Expected fisheries without project
(according to ‘fisheries expert’)
Impact of the
project
Expected fisheries with project
(according to ‘fisheries expert’)

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Session 3
Step 3: Quantify the predicted impacts
This is perhaps the most important and most common failure in cost-benefit
analysis.
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”.

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