Scientists predict that some climate change is already inevitable, even if greenhouse emissions are stabilised. Adaptation strategies will be of comparable importance to reducing emissions. However, the specific effects of climate change are currently unknowable, especially at the local level. Given this uncertainty, deterministic adaptation strategies are inappropriate. Rather than building 'worst-case scenario' sea walls, for example, strong foundations can be laid-so that walls can be built (or not built) in future to match actual climatic conditions without incurring unnecessary upfront expense. Other examples of such 'real options' are provided to illustrate the feasibility of the approach.
Multi-criteria analysis (including Triple Bottom Line approaches) is fundamentally flawed in principle, and is open to abuse by special-interest groups. Its increased use poses a significant risk to the quality of policy formulation by Australian governments. 3 Markets provide information on consumers' willingness to pay where goods and services are bought and sold. Where no markets form, as is the case for public goods, economists have developed alternative 'non-market valuation' techniques to estimate willingness to pay (see Hanley & Spash 1993). 4 The antecedents of attempts in the United States to establish an assessment methodology for government projects are probably older. For example, Reuss (1922: 105) cites the 1808 Gallatin report as demonstrating that Congress generally 'supported public works whose benefits contributed an "annual additional income to the nation" '.
A factor common to all adaptation measures is the uncertainty that is the hallmark of climate change. The timing, intensity and location of climate change impacts is not known to any degree of precision. Because most deterministic analyses and policy prescriptions ignore this uncertainty, their recommendations are likely to waste community resources. Except by chance, adaptation measures will either be over-engineered, or they will be inadequate and result in harm. Applying real options thinking allows an incremental and flexible approach. Adaptation measures are implemented only as better knowledge becomes available over time. Several examples are given of real options in the Mekong Delta, with a comparison of net present values of two housing alternatives. It is essential to undertake net present value calculations when comparing different projects to ensure that the value of any options is weighed against other costs and benefits.The Centre for Climate Economics & Policy (ccep.anu.edu.au) is an organized research unit at the Crawford School of Economics and Government, The Australian National University. The working paper series is intended to facilitate academic and policy discussion, and the views expressed in working papers are those of the authors. Contact for the Centre: frank.jotzo@anu.edu.au. 1 NOTES ON APPLYING 'REAL OPTIONS' TO CLIMATE CHANGE ADAPTATION MEASURES, WITH EXAMPLES FROM VIETNAM Leo Dobes Adjunct Associate Professor Crawford School of Economics and GovernmentThe Australian National University Leo.Dobes@anu.edu.au Personal page: http://www.crawford.anu.edu.au/staff/ldobes.php AbstractA factor common to all adaptation measures is the uncertainty that is the hallmark of climate change. The timing, intensity and location of climate change impacts is not known to any degree of precision. Because most deterministic analyses and policy prescriptions ignore this uncertainty, their recommendations are likely to waste community resources. Except by chance, adaptation measures will either be over-engineered, or they will be inadequate and result in harm. Applying real options thinking allows an incremental and flexible approach. Adaptation measures are implemented only as better knowledge becomes available over time. Several examples are given of real options in the Mekong Delta, with a comparison of net present values of two housing alternatives. It is essential to undertake net present value calculations when comparing different projects to ensure that the value of any options is weighed against other costs and benefits.
Access to water is a critical aspect of livestock production, although the relationship between livestock weight gain and water quality remains poorly understood. Previous work has shown that water quality of poorly managed farm dams can be improved by fencing and constructing hardened watering points to limit stock access to the dam, and revegetation to filter contaminant inflow. Here we use cattle weight gain data from three North American studies to develop a cost-benefit analysis for the renovation of farm dams to improve water quality and, in turn, promote cattle weight gain on farms in south-eastern Australia. Our analysis indicated a strong likelihood of positive results and suggested there may be substantial net economic benefit from renovating dams in poor condition to improve water quality. The average per-farm Benefit-Cost Ratios based on deterministic assumptions was 1.5 for New South Wales (NSW) and 3.0 for Victoria in areas where rainfall exceeds 600mm annually. Our analyses suggested that cattle on farms in NSW and Victoria would need to experience additional weight gain from switching to clean water of at least 6.5% and 1.8% per annum respectively, to break even in present value terms. Monte Carlo simulation based on conservative assumptions indicated that the probability of per-farm benefits exceeding costs was greater than 70%. We recommend localised experiments to assess the impact of improved water quality on livestock weight gain in Australian conditions to confirm these expectations empirically.
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