Thailand UNDP-GIZ workshop on CBA - A review of conduction cost-benefit analysis

Cost-Benefit Analysis: Advanced Training
Presentation by Dr. Benoit Laplante
Bangkok, Thailand
November 27-28, 2017
Session 1:
A Brief Review of Key Issues when Conducting CBA

2
4) Economic versus cost-effectiveness analysis
3) Economic, financial, and fiscal analysis
2) The role of cost-benefit analysis
Outline of presentation
1) Climate change and agriculture
7) Climate-proofing investment projects
6) Selecting adaptation options
5) Steps when conducting cost-benefit analysis

3

Climate change and agriculture
In general:
“The study shows that temperature and precipitation changes in
both climate scenarios will significantly lower crop yields and
production— with irrigated and rainfed wheat and irrigated rice
affected the most.”
Source: World Bank. 2010. Economics of Adaptation to Climate Change. Washington, D.C.
Scientific literature:
 Climatic Change
 Nature Climate Change
 Science
 Proceedings of the National Academy of Sciences (PNAS)

In general:
Agriculture
yield
Temperature22C 28C
Increase of 1
degree
increases yield
Increase of 1
degree has limited
impact on yield
Increase of 1
degree
reduces yield

In Thailand:
Climate change already has an impact on the sector.

Results from selected studies
• In a study conducted by ONEP in 2008, negative impacts on corn
productivity ranged from 5–44%, depending on the location of
production.
• By using the Crop Environment Resource Synthesis (CERES)
model, the Office of Environmental Policy and Planning (2000)
has estimated that rice grown under rainfed conditions was found
to be highly vulnerable to climate change. The study estimated
that yields of rice could decline by as much as 57% compared to
the baseline.
Office of Environmental Policy and Planning. 2000. Thailand's Initial National Communication
under the United Nations Framework Convention on Climate Change. Ministry of Science.
Technology. and Environment. Bangkok, Thailand. 100 p.

• In a more recent paper, Felkner et al (2009) used the computer crop
growth model DSSAT to estimate the impacts of climate change
under the A1FI (highest emissions trajectory scenario) and the B1
(lowest emissions trajectory scenario) for the period 2040-2069. The
authors estimate a reduction in aggregate yield ranging between 3.5%
and 13.8% compared to neutral climate simulations
Felkner, J. et al. 2009. Impact of climate change on rice production in Thailand. American
Economic Review. 99. 2. 205-210.

• Using a Ricardian approach, Attavanich (2012) estimates the
impacts of climate change on farm value under the A2 and B2
scenarios for the 2040-2049. Results indicate that farmland values
per rai are projected to decrease from $2,703 per rai to $2,068 and
$2,538 per rai in climate scenarios A2 and B2, respectively. This
would indicate decreases in agricultural output ranging
approximately between 6.1% and 23.5%.
Attavanich, W. 2012. The Effects of Climate Change on Thailand’s Agriculture. Mimeo. Kasertsart
University, Thailand.

ADB. 2009. The Economics of Climate Change in Southeast Asia: A Regional Review. Manila.
• The Asian Development Bank estimated a potential reduction of rice
yield under the B2 and A1FI emissions scenarios of approximately 5%
and 15% respectively by 2050.

Overwhelming message:
Crop yields will fall as a result of climate change. This may
raise prices of agricultural commodities (with adverse
impact on the poor), and endanger food security.
What to do?
Simple question:
Answer:
Not so simple.
Especially if we consider that climate change will have
impacts on many things other than agricultural productivity.
So….what is the best to use our limited resources across
sectors? How much should society invest in adaptation?

12

In presence of limited resources, decision makers are left
with the difficult problem of evaluating and choosing
investment projects and assessing policies in a context of
significant complexity and uncertainty.
For this purpose, decision makers have a need for a
framework which structures information in a way which
makes feasible and transparent this process of evaluation
and selection.
The role of cost-benefit analysis

Cost-benefit analysis provides a means of assessing and
comparing the impacts of projects and policies, even
when benefits and costs occur over long time horizons.
It provides a systematic means to identify, quantify, and
wherever possible monetize all impacts of a project or
policy (including their environmental impacts), and
present these impacts as social costs and social benefits.
The role of cost-benefit analysis is to provide information
to the decision-maker about the costs and benefits of the
project or the policy.
The cost-benefit analysis informs decision-makers, does
not replace them.

1) Is a process (technique) to compare all the gains and losses
resulting from a project or from a policy into a common unit of
measurement.
Technically, cost-benefit analysis…
2) Summarizes all positive (benefits) and negative (costs)
impacts of a project or policy into one number.
4) Aims to provide information about the economic efficiency of a
project or policy.
3) The economic analysis of a project (or policy) serves as an
organizing framework for stakeholders to discuss the various
aspects, both positive and negative, of projects or policies.

Numerous criteria are used (or should be used, or must be
used) to assess projects or policies, such as:
• The physical or biological impacts;
• Economic efficiency;
• Distributional equity;
• Social and cultural and religious acceptability;
• Operational practicality;
• Administrative feasibility;
• Legality.
Warning
The economic analysis informs decision-makers and policy-
makers about the economic efficiency of projects or
policies.

Economic efficiency is only one criterion used to decide
whether a project should be funded or not. Other criteria
are also used.
Hence, even if the economic analysis of an investment
were to show that the project should not be recommended
from an economic efficiency point of view, it does not
mean that the project will not go ahead.
Warning

For any given project (or policy), we want to know:
Is this a good project (or policy)?
For any given group of projects (or policies), we want to
know:
Which project (or policy) is better?
Given a set of options all achieving a given objective, we
want to know:
Which of these options is better?

However:
• Good or better for whom?
• For a project proponent OR for Government OR for
society?

20

• Cost-benefit analysis has become a generic term. As its name
suggests, it is an analysis which aims to compare the costs
and benefits of a project or a policy.
Cost-benefit analysis:
• The question is: Whose costs and whose benefits?
• The answer to this question will determine the difference
between a financial analysis, a fiscal analysis, or an economic
analysis.
Economic, financial and fiscal analysis
• Economists will generally equate cost-benefit analysis to
economic analysis where costs and benefits to society are
included in the analysis. However, project proponents also do
cost-benefit analysis where costs and benefits to the project
components are included in the analysis.

Financial analysis:
• A financial analysis is a cost-benefit analysis but where:
• The only stakeholder included in the analysis is the developer
(or investor).
• The only costs included in the analysis are the costs of the
project to the developer or investor.
• The only benefits included in the analysis are the benefits to
the developer or investor.
• A financial analysis examines the profitability of a project for
the developer of the project or for the investor; it is based on a
cash-flow analysis and looks at costs paid by the investor, and
revenues received by the investor.
The question is:
Will the project increase investors’ wealth?

Fiscal analysis:
• A fiscal analysis is a cost-benefit analysis but where:
• The only stakeholder included in the analysis is the Government.
• The only costs included in the analysis are the costs of the project to
State budget.
• The only benefits included in the analysis are the benefits of the
project to State budget.
The question is:
What is the impact of the project on Government budget?
• A fiscal analysis examines the impacts of the project on
government’s fiscal (budgetary) position.

Economic analysis:
• An economic analysis is a cost-benefit analysis but where:
• The stakeholder is all society, not only the developer or investor.
• The costs included in the analysis are all costs of the project for
society resulting from all impacts.
• The benefits included in the analysis are all benefits of the
project for society.
The question is:
Will this project increase society’s well-being (welfare)?

Is this a good project?
For investor For society
Private sector Public sector
Conduct a
financial
analysis or
private cost-
benefit analysis
Conduct a
fiscal analysis
Conduct an
economic
analysis or
social cost-
benefit analysis
For government
These 3 types of analyses are very different from one
another and will provide different types of information to
different types of decision-makers.

Hence:
• Before conducting a “cost-benefit” analysis, a first key step is
to ask: What type of cost-benefit analysis or whose point of
view will this analysis take?
• Once an answer is given to the above question, then the
analyst must ensure that only those costs and benefits
consistent with that point of view are included in the analysis.
• As mentioned earlier, economists will generally equate cost-
benefit analysis to economic analysis in which one aims to
assess the impacts of the investment project or policy on
society’s welfare.

27

Economic (cost-benefit) analysis:
• When undertaking a cost-benefit analysis, we compare the
costs and the benefits of a proposed investment (or policy)
and ask the question:
“Is this a good project (or policy) for society?”
Economic versus cost-effectiveness analysis

Cost-effectiveness analysis:
• When undertaking a cost-effectiveness analysis, we do not
ask the question:
“Is this a good project (or policy) for society?”
• Instead, we ask the question:
“What is the least cost way of achieving the same stream of
benefits or the same objective or the same target?”

Examples:
“We must achieve net zero GHG emissions by 2050.”
“Roads must be able to withstand a 1-in-50 flood event.”
Question is: What is the least cost way of achieving these
targets?
“Agricultural productivity (yield) in Thailand must be
maintained in the future despite the projected impacts of
climate change.”

What about multi-criteria analysis?
Common statement:
“When the benefits of an investment or a policy cannot be
quantified monetarily, then a multi-criteria analysis can be used
to assess the investment or policy.”
This is not quite correct. MCA is not a substitute to cost-benefit
analysis.
MCA is always done. Decisions are always based on many
criteria. Sometimes economic efficiency is one criteria, and
sometimes it is not. Sometimes economic efficiency is very
important, and sometimes it is not so important.

32

Step 2: Identify all potential physical impacts of the project.
Step 4: Monetize impacts.
Step 5: Discount to find present value of costs and benefits.
Step 6: Calculate net present value.
Step 8: Make recommendations.
Step 3: Quantify the predicted impacts: With and without project
Step 1: Define the scope of analysis.
Step 7: Perform expected value and/or sensitivity analysis.
CBA: 8 steps

The impacts of a proposed investment project are NOT defined
by comparing a situation today (before) project and after
project.
Step 3: With and without project
The impacts of a proposed investment project are defined by
comparing a situation in the future without project and a
situation in the future with project.

36

Provided that adaptation is still needed, then society faces a
number of important questions, including:
• What is the cost of climate change expected to be for
different sectors (e.g. agriculture, water, health, coastal
resources, etc.)?
Selecting adaptation options

resources, etc.)?
• How much to invest in adaptation?

Net revenues
per rai
Time (as temperature
increases)
If no adaptation
available, this is the cost
of climate change.
Today Today +1 Today +2 Today +3 etc
More precisely: The cost of climate change
would be computed as the present value of
the estimated reduction in annual net
revenues.

Net revenues
per rai
increases)

Net revenues
per rai
increases)
Let’s now suppose that there is one
adaptation option possible.
??

Net revenues
per rai
increases)
Benefits of
adaptation
Net benefits of adaptation =
Benefits of adaptation (increase in net revenues
per rai) – Cost of adaptation investment

Net revenues
per rai
increases)
Benefits of
adaptation
??

Net revenues
per rai
increases)
Benefits of
adaptation
Residual
damages

Net revenues
per rai
increases)
Benefits of
adaptation
Residual
damages
Cost of climate change =
Cost of adaptation investment + Residual
damages

resources, etc.)?
• What are the costs and benefits of different adaptation
measures? Which adaptation measure to select?
• How much to invest in adaptation?
• What is the appropriate combination of soft measures (policies)
and hard measures (infrastructure)? How to account for the co-
benefits of ecosystem-based adaptation measures?

47

Climate-proofing investment projects
Society invests in:
• Roads, bridges, railways, ports, airports;
• Energy power plants;
• Irrigation schemes;
• Schools and hospitals;
• And many other things.
Many of these assets may be exposed and vulnerable to climate
change.
How much more should society be willing-to-pay to increase the
resilience of these assets to climate change?

http://www.adb.org/sites/de
fault/files/publication/17345
4/economic-analysis-
climate-proofing-
projects.pdf

A menu of possible decisions:
Invest
now
Be ready and invest
later if needed
Do nothing and invest
later if needed

• costs of climate-proofing now are relatively small while the expected
benefits are estimated to be very large (a low-regret approach), and/or
• costs of climate-proofing at a later point are expected to be prohibitive, or
climate-proofing at a later point in time is technically not possible; and/or
• among climate-proofing options there exist options which deliver net
positive economic benefits regardless of the nature and extent of climate
change, including the current climate conditions (a no-regret approach);
and/or
• the set of climate-proofing options includes options which not only
reduce project climate risks, but also have other social, environmental or
economic benefits (co-benefits). The presence of co-benefits, if any, must
be included in the economic analysis of adaptation options.
Invest now if:

• No climate-proofing investment is needed now, but the project can be
designed to accommodate climate-proofing in the future if and when
circumstances indicate this to be a better option than not climate-
proofing.
• This type of decisions aim to ensure that a project is climate ready.
Be ready and invest later if:

• costs of climate-proofing now are estimated to be large relative to the
expected benefits; and/or
• costs (in present value terms) of climate-proofing (e.g. retro-fitting) at a
later point in time are expected to be no larger than climate-proofing
now; and/or
• expected benefits of climate-proofing are estimated to be relatively
small.
Do nothing and invest later if:
Note: The decision to “do nothing” does not come from ignoring
climate change, but from rationally deciding out of a technical and
economic assessment that the best thing to do for now is to do
nothing.

Economic (cost-benefit) analysis aims to provide
information and guide decision-making.

Thailand UNDP-GIZ workshop on CBA - A review of conduction cost-benefit analysis

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