Towards guidance on the economics of adaptation

As highlighted in the previous chapter, there are a number of adaptation frameworks that can help with the initial sequencing and prioritization of early adaptation options. These can be linked to a set of decision-support tools, which match to the type of adaptation being considered, and identify the most appropriate conventional or DMUU approach to support economic appraisal.

However, a key question concerns how to use these approaches in practice, especially in the context of the FAO adaptation to fisheries and aquaculture toolbox. In this context, it is important to recognize there are different types of adaptation decisions, at various levels of decision-making:

  • Some studies will be focused at the national or strategic level and will involve more policy-level analysis.
  • Other studies will be focused at the programme or project level and will be more focused on options appraisal.

As outlined in Chapter 4, a national-level approach will focus on early adaptation frameworks, while a detailed project may use decision-support tools including DMUU. For the latter, the type of adaptation problem being addressed will determine the most appropriate tool to use. To illustrate, the consideration of adaptation in a new fisheries quay investment will be focused on infrastructure investment and could use techniques that consider uncertainty in infrastructure investment (e.g. decision scaling or ROA), while the integration of climate change into fisheries policy might look at some of the adaptative management approaches, for example, developing iterative pathways.

In addition, the approach will be influenced by the importance of the issues outlined in Chapter 3, i.e. whether there are major issues of uncertainty, whether discounting is an issue, and whether it is necessary to consider distributional effects (e.g. with equity weights) or non-monetary measures, as these will have a major influence on adaptation options. It is important to be clear about these assumptions (see Chapter 3) in order to ensure a balanced and reliable comparison between the different options.

This chapter[1] investigates these issues, providing some early analysis of possible guidance for the economics of adaptation for fisheries and aquaculture. This needs to be seen in the context of the overall adaptation policy cycle, which is discussed first in the following section.

Adaptation policy cycle

The use of this FAO Technical Paper Decision-making and Economics of Adaptation to Climate Change in the Fisheries and Aquaculture sits within a broader cycle of adaptation decision-making and appraisal (the adaptation policy cycle). There are a number of versions of the adaptation cycle (e.g. UKCIP, 2003 [Willows and Connell, 2003]; PROVIA, 2013 [Bisaro and Hinkel, 2013]; EEA, 2015), but they generally have a set of common steps, as set out in Figure 5. Figure 5 also shows some of the key aspects at each of the early stages, and how these relate to this publication.

Steps 1 and 2 will be undertaken as part of general adaptation planning, rather than adaptation economics, but a number of relevant issues are highlighted below. The main focus here is on steps 3 and 4, and on how the information in this publication can be used in practice, drawing on case studies.

This chapter provides some initial guidance on using economics in a scoping phase to identify a long list of possible adaptation options, and to help structure these options so that economic aspects are considered. This uses adaptation frameworks that can help prioritize early options for addressing short-, medium- and long-term climate risks. It then discusses approaches for detailed economic appraisal, to consider their detailed costs and benefits and help select the preferred option. This includes discussion of decision-support methods, including DMUU.

Step 1. Identify problems and objectives

The starting point for the adaptation policy cycle is to define the objectives and goals and to map out the problem that the policy, programme or project is trying to address. This will be undertaken in line with the FAO fisheries and aquaculture adaptation toolbox, but a number of issues are highlighted that help support the subsequent economic aspects in steps 3 and 4.

First, it is important to identify the timescale of the decision, i.e. not just in terms of potential risks, but also in terms of adaptation. For example, it is important to identify whether the focus is on informing near-term adaptation (e.g. a NAP, or an immediate project proposal). Second, it is also important to frame adaptation within the existing context of the decision, for example, whether the application is a stand-alone adaptation policy or investment, or whether it is looking to integrate climate change adaptation into an existing decision. In the case of the latter, it is critical to understand the underlying decision context and objectives, not just those of adaptation.

There is a role for economics at this early stage in setting out the economic rationale for action. There are often barriers that make it difficult for individuals, businesses and governments to plan and implement adaptation actions. These include economic, political economy and governance barriers, arising from market, information, policy and governance failures (Cimato and Mullan, 2010). It is therefore useful to identify these barriers, and how to overcome them, to help build up the economic rationale for adaptation, taking into account the most vulnerable groups (Poulain, Himes-Cornell and Shelton, 2018). This moves beyond a narrow focus on what “technical” option (or options) to implement, and captures the reason to act – as well as the best way of addressing the specific barriers (Cimato and Watkiss, 2017).

Step 2. Identify current climate related risks, then the future risks of climate change

A number of methodological approaches have been used to assess the vulnerability, risks and impacts[1] of climate change on fisheries and aquaculture (Barsley, De Young and Brugère, 2013; Brugère and De Young, 2015). This guidance does not seek to reproduce or update this, but it highlights issues to consider when undertaking these assessments, as they help support the subsequent economic analysis and appraisal in steps 3 and 4. These are:

  • The need to start first with current risks, then look to the future.
  • The need to consider future climate change risks over time, including uncertainty and potential major threshold risks.
  • Identification of the “target groups” for which the adaptation tools will be used.
  • The type of adaptation decisions and the risks of lock-in.

Many climate change assessments, and adaptation studies, start with a very detailed assessment of future long-term climate change scenarios and climate model projections. This makes the entire approach very science-led. Recent applied studies have highlighted that this type of science-first approach is generally unhelpful for informing adaptation decisions (Warren et al., 2016). Instead, the starting point is to look at current risks first. The key aspects are to understand how current weather and climate events are affecting the fisheries and aquaculture sector today, and whether there have been recent changes in trends, i.e. over recent years, that are increasing risks or impacts and/or creating new opportunities.

Once current risks have been understood, the next step is to consider future climate change. There is a lot of information on the potential risks of climate change to fisheries and aquaculture (Barange et al., 2018). For the subsequent analysis of economics, it is useful to look at the patterns of these climate risks over time (Figure 6). The key issue is to build up an understanding of when potential risks might emerge and who will be impacted. An illustration is provided below. When considering climate risks, it is also important to consider uncertainty (see Chapter 3). This includes the uncertainty over future levels of climate change, i.e. whether the world is on a 2 °C or 4 °C pathway, but also the uncertainty from different climate model projections for each of these pathways.

Step 3. Identify and sequence adaptation options

The next step is to identify adaptation options to address the potential climate risks. Most studies identify a long list of initial options, and then try and filter these down to a promising shortlist, for further subsequent analysis. Examples of adaptation options were given in Chapter 2 (based on Poulain, Himes-Cornell and Shelton, 2018). However, it can be difficult to identify the promising options, especially given there is often a very long list of possible risks, and a long list of adaptation options.

As set out in the Chapter 4, the use of frameworks for identifying early adaptation priorities is therefore extremely useful at this stage in the adaptation policy cycle, with the three areas of potential early investment: (i) no- and low-regret options that address current climate risks; (ii) early interventions to ensure that adaptation is considered in decisions that have long lifetimes or lock-in; and (iii) early adaptive management activities for decisions that have long lead times, or early adaptation to start preparing for long-term major climate change. At the programme level, especially in the national context, all three of these may be needed. Examples are given in Box 6. An example of this was presented in the Economics of Climate Change Study (United Kingdom of Great Britain and Northern Ireland), to look at potential opportunities for fisheries sector (Figure 8). This type of analysis can then be followed up by a more detailed pathway and roadmap for specific risks, i.e. to start thinking about the potential sequencing of options and choices for new policy, or to develop options that can then be analysed in more detail using one of the decision-support tools as part of an economic appraisal.this for cold water reefs,10 with information used to help analysis coral protection and regrowth options, in response to deep-water fishing, aragonite saturation horizon shoaling and acidification.

In many cases, the application of a scoping analysis may be sufficient. This might apply for a national aggregated analysis, or an early project stage analysis. However, in other cases, a more formalized appraisal may be needed. This may be required as part of country policy assessment, such as a requirement in regulatory impact assessment, or it may be required as part of the prescribed application process, for example, an appraisal for an application to a climate fund (e.g. an Adaptation Fund or Green Climate Fund project) or as part of the conditions for a development assistance project. This moves the cycle on to Step 4.

Step 4. Appraise adaptation options using economics

Once a shortlist of adaptation options has been made, it is sometimes necessary to undertake a more detailed appraisal of these options, taking into consideration the challenges raised in Chapter 3. The decision-support methods outlined in Chapter 4 can be applied to undertake this appraisal, but the type of approach that is relevant will depend on the decision context and the type of adaptation.

In cases where the appraisal is focused on short-term no- and low-regret adaptation, conventional decision-support tools can be used (see Box 4), such as CBA or MCA. In cases where early adaptation options are associated with non-market benefits, or involve non-technical aspects where quantification of benefits is difficult (e.g. institutional strengthening), this may require extended cost-benefit approaches, or decision-support methods that can include qualitative as well as quantitative aspects. The FAO EAF Planning and Implementation Tools provide useful information on many of the approaches for option identification including information on CBA (tool 9) and MCA (tool 31) (FAO, 2011-2019). The Mediation project gives additional information on the use of MCA for adaptation (Van Ierland, de Bruin and Watkiss, 2013).

However, when there is a need to consider longer-term climate change and, therefore, uncertainty, it may be more appropriate to use the DMUU methods (see Box 5). These tools are particularly relevant for project-level analysis. The Mediation Project published guidance on a number of these approaches including: robust decision-making (Watkiss and Dynzynski, 2013); real options analysis (Watkiss, Hunt and Blyth, 2013); portfolio analysis (Hunt and Watkiss, 2013); and adaptation pathways (Werners et al., 2013. ). There is also guidance on decision scaling published by the World Bank (Ray and Brown, 2015) and guidance on the Climate Risk Informed Decision Analysis (CRIDA) (Mendoza et al., 2018). However, as highlighted above, there are only a few applications to the fisheries and aquaculture sector to date.

As highlighted above, there is not one DMUU method that is “best” for all adaptation contexts in the fisheries and aquaculture sector. Indeed, each of the methods set out in Chapter 4 lends itself to particular types of adaptation decision (Watkiss et al., 2014). It is important to identify what the characteristics of the decision are, and then look at how these might match to relevant tools, taking into consideration the issues raised in Chapter 3. If the lifetime is long and there is lock-in involved, this would suggest that economic approaches such as decision scaling, robust decision-making or ROA could be more important. If there are reasons for a highly precautionary approach, i.e. major downside risks in making mistakes, such as from major port failure, this would suggest overdesigning options might be warranted, i.e. using rule­based decision-support methods to minimize regrets (although it would still be useful to consider whether lower-cost or flexible alternatives are available to address this). Finally, if the focus is on longer-term major risks, and there is the potential to learn over time as with fisheries and/or aquaculture policy, it can be useful to consider more iterative approaches (adaptation route-maps or ROA).

As highlighted in Chapter 4, DMUU approaches can involve significant time and resources. Formalized applications of these approaches can be used for major programmes or projects, but in many cases the nature of the project (and available resources) may limit application. In these cases, there is the potential to use light-touch approaches, i.e. that use the concepts of these methods, but undertake simple level analysis. For example, it is possible to use the characteristics of real options (decision trees and the consideration of learning and/or flexibility) but without the formal derivation of probabilities and detailed economic analysis.

The analysis of the decision characteristics of a project can be used to identify potentially suitable approaches for particular adaptation projects, as illustrated in Table 4. The capture fisheries sector does not involve the same degree of long lifetimes and lock-in as other sectors, as there is less investment in long-lived infrastructure or land-use change. In capture fisheries, the main areas are associated with coastal fisheries infrastructure (new landing areas, and port facilities), and major capital investment (vessels and equipment). Nonetheless, these investments are early priorities for adaptation to ensure climate-smart development, i.e. to ensure that future climate risks, but also uncertainty, are taken into account, and there are some examples of studies and relevant options. However, these lifetime and lock-in issues are perhaps more important for the aquaculture sector, especially for coastal and surface waters, because of the high upfront investment costs and the potential for larger impacts (near-shore and surface water, where there is less potential for species migration).