The document provides an overview of a training module on the use of cost benefit analysis (CBA) in appraising adaptation options as part of national adaptation plans (NAP). It highlights the importance of CBA in assessing climate vulnerabilities, prioritizing adaptation options, and understanding the implications of discount rates on decision-making. Additionally, the document discusses the limitations of CBA and outlines the steps involved in conducting a CBA for adaptation projects.

1. Slide 1
National Adaptation Plan (NAP)
Country-level training
Supported By In cooperation with
Session 7
Appraising Adaptation Options
Presented by Nat Pinnoi, Ph.D.
Private Sector Finance Specialist
UNDP Bangkok Regional Hub

2. Slide 2
Overview of this module
The module will:
• Inform stakeholders on the role of cost benefit analysis
(CBA) in the appraisal of adaptation options (or projects)
• Introduce policy makers to the usefulness of cost benefit
analysis
• Highlight the limitations of CBA in the appraisal of
adaptation options
• Provide resources and references that can serve as a
reference point

3. Slide 3
What can you expect to learn from this session?
• Reflect on the need for ranking and prioritizing
adaptation options that emerge as equally
plausible form in the NAP process
• Understand the steps involved in carrying out a
Cost Benefit Analysis (CBA) of options (at the
project level)

4. Slide 4
What can you expect to learn from this session?
• Reflect on the potentials and limits of CBA for
appraising adaptation options
• Learn how you can use CBA practically in the
context of the core elements of the NAP process
• Understand that the choice of the discount rate
and the expected climate damage significantly
influence the result of a CBA

5. Slide 5
The role of CBA in the NAP process
The NAP process typically involves four elements:
 (A) Laying the groundwork and addressing gaps
 (B) Preparatory elements
 (C) Implementation strategy
 (D) Reporting, Monitoring and Review.
CBA is an important tool in helping countries at (B)
and (C) stages and helps to narrow down gaps in
(A), especially the stocktaking

6. Slide 6
The role of CBA in the NAP process
Some of the areas where CBA becomes valuable
in the process include:
• Assessing climate vulnerabilities and
identifying adaptation options at different levels
• Prioritizing adaptation options in national
planning
• M&E – theories of change and impact
evaluation

7. Slide 7
Economic tools for ranking and prioritization
of adaptation options
Source GIZ (2013)

8. Slide 8
CBA in Action
16/01/2017 NAP country-level training

9. Slide 9
Objective ways to know we are
maximizing benefits
• Evaluating distinct but equally plausible adaptation options (or
measures) requires a CBA of each alternative option
• This will allow an objective comparison to be made between
the options. This module will focus on comparisons on a
project basis.
• For adaptation options that have implications on entire sectors,
more complicated analysis such as Input-Output and/or
General Equilibrium Model is required to see how entire
economic systems are affected. This can be done at many
levels – a sector by sector, an inter-sectoral approach or a
sub-sector by sub-sector

10. Slide 10
Objective ways to know we are
maximizing benefits
Example of project analysis under uncertainty:
• Under Business as Usual, suppose a low dam costs $1 billion, a
high dam costs $1.5 billion and with current climate, a low dam
has benefits of $1.2 billion and high dam of $1.6 billion
 low dam is better with $200 million net gain vs. $100 million
net gain from high dam [B/C of low vs. high dam under
Business as Usual = ??]
• Because of CC, more intense precipitation is expected,
suppose benefit of low dam rises to $1.3 billion and benefit of
high dam rises to $2 billion
 high dam now better option with $500 million net gain vs. $300
million net gain form low dam [B/C of low vs. high dam
under CC scenario = ??]

11. Slide 11
Cost benefit analysis: intro - I
• When making a decision, esp. in the public sector,
trade-off analysis is inevitable. Costs and benefits of an
action and / or inaction need to be understood for policy
decisions.
• Add up costs and add up benefits; if net benefits are
positive: do the project!
• Simple, right?
• Not quite! Issue of measurement of costs
and benefits.

12. Slide 12
Cost benefit analysis: intro - II
• Often times, costs are simpler to figure out – tend to be
one-off and are market transactions e.g. one time cost of
constructing an irrigation system
• Benefits can be trickier e.g.: How do we calculate the
market (e.g. wealth) and non-market (e.g. health)
benefits over time?

13. Slide 13
CBA: 8 suggested steps
1. Define the scope of analysis
2. Identify all potential impacts of the project
3. Quantify the predicted impacts
4. Monetize impacts
5. Discount rate to find present values of costs and benefits
6. Calculate the net present value (NPV)
7. Perform expected value and/or sensitivity analysis
8. Make recommendations

14. Slide 14
Time preference and discounting – I
• When determining the optimal allocation of resources over
time, one must deal with time preferences.
• CBA requires consideration of stream of benefits over time
against costs which incur largely today (e.g. install irrigation
system that is expected to be useful over x years).
• The problem is that the value of money does not stay
constant over time. Do you want to get $100 today or $110 in
ten years from now?
• Also, most individuals prefer to receive benefits now as
opposed to receiving the same level of benefits in future (i.e.
they have positive time preferences).

15. Slide 15
Time preference and discounting – II
So, we need a system:
• The discount rate (value between 0 and 1) is a
product of society’s time value of money (composed
of the pure rate of time preference and the goods
discount rate) [closer to 0: future is more important;
closer to 1: today is more important].

16. Slide 16
Discounting: How do we do it?
• Use this formula to convert all
future values to present values:
• PV = FV(t) / (1+r)t
Where
• FV is expected future value
• r is the discount rate (value
between 0 and 1)
• t is time.
• Example: How much is $100000 in
30 years worth today? Try it using
different values for r!
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
0 5 10 15 20 25 30
Value
Year
The impact of a discount rate on present value
estimates
15%
12%
9%
6%
3%
Source GIZ (2013)

17. Slide 17
Potentials and limits of CBA within
the NAP process – I
• CBA works best when it is possible to estimate both the
market and non-market values of all benefits that accrue.
• It is a systematically estimated analysis that provides a
key piece of information to facilitate a decision. It is not
meant to be used as the sole decision-criteria.
• If properly executed, CBA enables comparison, in equal
terms, the investments that have to be made today with
benefits that accrue over time.

18. Slide 18
Potentials and limits of CBA within
the NAP process - II
• The major limitations of a CBA is that not all costs and benefits
can be quantified in monetary terms.
• The discount-factor can matter in the final analysis.
• Need to also account for uncertainty over time. Can use
sensitivity analysis to capture some uncertainty.
• Within the NAP process, results from CBA can be used as one
of the ways of evaluating and ranking adaptation options after
they have been identified. Political, social and other
considerations will also matter along with economic
considerations.

19. Slide 19
Exercise: CBA
• The case developed for the exercise is the construction of a new
irrigation scheme including a dam construction for agricultural
production. This is considered a measure for adapting to increasing
water scarcity from climate change.
• The CBA accounts cost and benefits of the project over a period of 25
years.
• The CBA is conducted under certain assumptions.
Discount rate (value between 0 and 1): A product of society’s time
value of money (composed of the pure rate of time preference and the
goods discount rate) [closer to 0: future is more important; closer to 1:
today is more important].
Climate damage: The reduction of benefits through damages from CC.
In the case construction of the exercise it is assumed that the total
agricultural benefits are reduced through negative impacts on the yields
despite the irrigation measures.