This document discusses cost-benefit analysis (CBA) and portfolio development for climate change adaptation measures. It details methods for valuing environmental costs and benefits, challenges in measurement, and provides examples of CBA in agricultural practices such as biogas digesters and rice-shrimp farming. The analysis includes various financial metrics and prioritization of adaptation options based on their net present value and internal rate of return.

1. Cost Benefit Analysis (CBA) and portfolio
development for adaptation options
Dr. Tran Dai Nghia
IPSARD

2. 1. Costs of climate change
2. Cost-benefit analysis
3. Valuing the Environment bebefits and costs
4. Problems of measurement of environmental
costs/benefits
5. CBA for Evaluating Proposed CAMs
6. Some example
Contents

3. 3

4. - Cost benefit analysis is an economic analysis is used to
evaluate the desirability of a given intervention/CC adaption
measure
- The method compares all costs and benefits that can be
expressed in monetary terms.
- Cost benefit analysis is used to evaluate practices e.g.,
improved yields can be realized or/and adapted or/and
mitigated climate change.
- This also allows farmers to choose the possible efficient
strategy/CAM
- The CBA focuses on the quantitative evaluation of climate
change impacts and allows for estimation of the net benefits
of response options/measures
Cost-benefit analysis

5. NB = ƩTB – ƩTC Where:
NB represents the net benefits
TB represents the total benefits
TC represents the total costs
For practices that do not have direct costs and benefits, the
shadow pricing and opportunity costs were used to quantify
computed.
The NPV as computed as
The Net present Value = NPV = Ʃ(B t - Ct) / (1 + r)t.; Where;
Bt = Total benefits in the year t
Ct = Total costs in the year t
r = Discount rate
(1+r)t= Discount factor for year t
Cost-benefit analysis

6. Compare across different investments, lifespans, the
Equivalent Annual Annuity (EAA) as recommended
𝐸𝐴𝐴= 𝑟(𝑁𝑃𝑉)/1−(1+𝑟)−𝑛
Where EAA = Equivalent Annual Annuity
NPV = Net Present Value
r = discount rate/period
n = number of periods
Cost-benefit analysis

7. Internal Rate of Return (IRR)
Estimating NPV1 of the CC measure.
Estimating NPV2 of the CC measure using different interest
rate
If NPV positive then using r2 > r1
If NPV negative then using r2 < r1
Then IRR = a + {[NPVa/ (NPVa – NPVb)] (b – a)} %
Trong đó:
a is the lower interest rate used (r1 if positive, r2 if otherwise)
b is the higher interest rate used (r2 if negative, r2 if otherwise)
NPVa = NPV if a is used
NPVb = NPV if b is used
Cost-benefit analysis

8. Payback period:Payback period is the time in which the initial cash
outflow of an investment is expected to be recovered from the cash
inflows generated by the investment
If the cash flow per period from the project is even:
If the cash flow per period from the project is uneven:
Cost-benefit analysis
Payback Period =
Initial Investment
Cash Inflow per Period
Payback Period = A +
B
C
Where:
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period
A;
C is the total cash flow during the period after A

9. 9
Valuing the Environment bebefits and costs:
• A measure used in survey-based valuation techniques,
known as contingent valuation method (CVM), indicates an
individual’s willingness to pay money to obtain some
derived level of a good or service for an improved
environment categorized as either instrumental or intrinsic.
• Instrumental or use value, can be defined as “accruing from
those benefits which are attributed to present consumption
of the goods/resources
• Direct use value may emerge from exchange or outside of
exchange through self-consumption of resources to which
individuals have access.
• Indirect use value is the main consequence of the
ecological functions that the natural resources perform.

10. 10
• Option value refers to willingness of the people to keep the
option of postponing the decision on the use of the
resources.
• Existence value represents the value which an individual is
willing to pay for the environmental amenity, even though
that person receives no direct value. The existence value is
often termed as non-use value.
• Total economic value (TEV) consists of its use value (UV)
and non-use value (NUV)
• TEV = UV + NUV
• Use value may be divided into direct use value (DUV), the
indirect use value (IUV) and the option value (OV).
Therefore, equation (1) can be rewritten as
• TEV = [DUV + TUV + OV] + [NUV]

11. 11
Problems of measurement of environmental
costs/benefits
Market Prices:
• When there are adverse health effects and loss in productivity
due to environmental damage, market prices are to evaluate
them.
• The procedure is to evaluate damages due to soil erosion,
deforestation, and air and water pollution, GHG. For this
purpose, the ecological relationship between environmental
damages and its effects on production or health are estimated
on the basis of prices to derive monetary values.
• Welfare losses relating to health risks due to polluted
environment are measured by income foregone because of
illness or premature death. Such estimates are difficult to
compute because they rely on loss in income.

12. 12
Costs of Replacement:
People and firms invest in installing alternate devices to avert
environmental damage of air, water and land. Such
investments can provide an estimate of environmental
damage. But the effects of damages cannot be evaluated.
Surrogate Markets:
• The effects of environmental damages on other markets
like property values and wages of workers are also
evaluated.
• Valuation in the case of property is based on risks
involved in evaluating the value of property due to
environmental damage.
• Jobs with high environmental risks will have high wages
which will include larger risk premiums. But this technique
is impracticable because property owners and workers
are ignorant of the effects of environmental damages.

13. 13
Social Discount Rate
Environmental degradation leads to costs and environmental
improvements confer benefits on CAMs.
• The problem of measuring environmental damage is to
evaluate it and compare it with the cost of preventing it.
• The main problem is how to measure costs and benefits of
environmental effects on the present and future
generations. For this, a rate of discount is needed for
discounting all costs and benefits, but there is lot of
confusion.

14. 14
• Discount rates are high, the level of investment falls which
discourages development projects and slows down the pace
of development, shifts the burden of high costs to future
generations.
• The main problem is how to choose a social discount rate.
This cannot be the market rate of interest because of
uncertainties and imperfections of capital markets.
• Majority of economists measure the social rate of discount at
government’s borrowing rates on long-term securities
because they are riskless. But there are numerous borrowing
rates on government securities relating to different time
periods. The problem is which rate to choose as the social
discount rate.
• Many economists favour social rate of time preference and
opportunity cost of capital in measuring the cost and benefit
of environmental degradation.

15. Biogas digester in pig production
Traditional practice CSA practice(Biogas)
Outflows 472,800 480,500
Initial investment Cost 23,500 33,500
Building digester 10,000
Building pigpen 22,000 22,000
Pump 1,500 1,500
Gas stove 1,000 1,500
Maintenance Cost 5,000 5,000
Digester maintenance -
Pigpen maintenance 5,000 5,000
Annual Input Cost 406,000 406,000
Breeding Pig 45,000 45,000
Feed 360,000 360,000
Veterinary 1,000 1,000
Gas 40,800 36,000
Family labour 40,800 36,000
Inflows 459,000 459,176
Sales Revenue from Pig 459,000 459,000
G emission savings* 1,200
Earning from biogas 176
NPV** (EAA) 554 3179
IRR 9% 21%
NPV (EAA Private) 554 3014
IRR (private) 9% 21%

16. Sensitivity analysis for pig raising and pig with biogas
digester
Price
(.000VND/kg)
Traditional practice CSA practice
IRR (%) NPV IRR (%) NPV
44.0 - -59,910 - -39,147
44.5 - -28,244 0 -9,647
45.0 9 3,462 21 19,851
45.5 35 35,148 38 49,356
46.0 58 66,835 54 78,849
46.5 79 98,521 69 108,347

17. Sensitivity analysis for pig raising and pig with biogas
digester installed when pig productivity changes
Yield (kg
per a pig
sold)*
Traditional practice CSA practice
IRR (%) NPV IRR (%) NPV
66 - -80,813 - -58,234
67 - -38,475 - -19,191
68 9 3,462 21 19,851
49 43 45,400 43 58,844
70 72 87,338 64 97,937

18. 2 rice seasons and rice- shrimp
Traditional practice (rice-rice) CSA practice (rice-shrimp)
Outflows 66876 104641
Rice 66876 39113
Variety 2156 1078
Tillage 6160 3080
Fertilizer 12560 6280
Pesticides 3080 1540
Irrigation 3850 1925
Harvesting 3080 1540
Land rent 11,350 11,350
Family labor 24640 12320
Shrimp 65528
Field digging 3000
Field cleaning 1000
Lime 3850
Variety 1078
Feed 30000
Veterinary 1500
Harvesting 23100
Family labor 2000
Inflows 66200 192764.5
Sales revenue from Rice* 64200 21000
Sales revenue from Straw 2000 1000
Sales revenue from shrimp* 170,000
HG emission savings 765
NPV** -2334 84021
IRR 0% 22%
NPV(family labors excluded) 20818 94359
IRR (family labors excluded) 9.3% 24.1%
NPV(no labor private) 20818 93652

19. Sensitivity for changing in saline level (family labors
excluded)
Saline level
(0/00)*
Rice-rice (ST5)
Shrimp-rice
(ST5 in Su.-Aut)
IRR (%) NPV IRR (%) NPV
2.0 9.3 20,818 24.1 94,359
2.5 8.3 18,267 24.1 94,359
3.0 7.2 15,715 24.1 94,359
3.5 6.1 13,165 24.1 94,359
4.0 5.1 10,614 24.1 94,359
4.5 3.7 7,464 24.1 94,359
5.0 2.7 4,912 24.1 94,359
5.5 1.6 2,662 24.1 94,359
6.0 0 100 24.1 94,359

20. CSA option NPV IRR
Initial
endmt
Risk
tolerance
Total
score
New
ranked
Biogas digester in pig
production 1 5 4 3 13 6
Applying ICM in rice
production 6 4 6 1 17 2
Water saving
irrigation for upland
crop 3 8 3 2 16 4
Rice -Mushroom from
rice straws 5 3 8 1 17 2
Rice- Shrimp
Rotation in coastal
area 7 6 5 3 21 1
Converting two rice
to upland crop
(jujube) 2 7 2 2 13 6
Applying saline
tolerance rice variety 4 1 7 3 15 5
Shifting two rice
seasons to one rice
and fish production 8 2 1 1 12 8
Prioritization of 8 top CSA options based on the CBA/portfolio
development

21. 21
CBA for Evaluating Proposed CAMs
A public cost- benefit framework is appropriate to
assess the desirability of government initiative, such as
green house gas reduction program and application of
different climate change adaptation measures. These
usually involve various social and environmental
impacts of these /measures which the policy makers
want to assess.
- NPV/EAA
- IRR
- Payback period
- Risk tolerance
- Upfront cost

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23. THANK YOU!