A Framework for Benefit-Cost Analysis of Adaptation to Climate Change and Climate Variability

The potential damages of climate change and climate variability are dependent upon the responses or adaptations that people make to their changing environment. By adapting the management of resources, the mix and methods of producing goods and services, choices of leisure activities, and other behavior, people can lessen the damages that would otherwise result. A framework for assessing the benefits and costs of adaptation to both climate change and climate variability is described in the paper. The framework is also suitable for evaluating the economic welfare effects of climate change, allowing for autonomous adaptation by private agents. The paper also briefly addresses complications introduced by uncertainty regarding the benefits of adaptation and irreversibility of investments in adaptation. When investment costs are irreversible and there is uncertainty about benefits, the usual net present value criterion for evaluating the investment gives the wrong decision. If delaying an adaptation project is possible, and if delay will permit learning about future benefits of adaptation, it may be preferable to delay the project even if the expected net present value is positive. Implications of this result for adaptation policy are discussed in the paper.