Transcript Title

On the Economics of Climate-Proofing
Infrastructure Investment Projects
Presentation by Dr. Benoit Laplante
Environmental Economist
Consultant
Asian Development Bank
March 12, 2013
Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
2
Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
3
On the meaning of climate-proofing
“Climate proofing is a shorthand term for identifying risks to a
development project (…), and ensuring that those risks are
reduced to acceptable levels through long-lasting and
environmentally sound, economically viable, and socially
acceptable changes implemented at one or more of the
following stages in the project cycle” (ADB, 2005).
The expression “climate proofing” is meant as a process that
aims to identify risks that an investment project may face as a
result of climate change, and to reduce those risks to levels
considered to be acceptable.
It does not imply a complete mitigation of the potential risks of
climate change.
4
Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
5
Costs of climate change vs. benefits of adaptation
Costs of climate
change
Cost and benefits of the
project without climate
change
Cost and benefits of the
project with climate
change
Cost and benefits of
the project without
adaptation
Cost and benefits
of the project
with adaptation
Benefits of
adaptation
6
Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
7
Climate-proofing investments
Technical Guidelines
Sub-divide the climate-proofing process into 6 sets of activities
and 20 steps:
Activities
Steps
1. Project risk screening and scoping
2. Impact assessment
1 to 6
7, 8, and 9
3. Vulnerability assessment
10, 11 and 12
4. Adaptation assessment
13 to 16
5. Implementation arrangements
17 and 18
6. Monitoring and evaluation
19 and 20
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Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
9
Assessing exposure and vulnerability
Activities
1. Project risk screening and
scoping: How is the proposed project
(project characteristics) exposed to the
impacts of climate change over its
lifespan? What are the climate
parameters of most interest to the
project? Is sufficient information
available to undertake an assessment?
Who are the main stakeholders?
Steps
Step 1: Screen the project for
exposure to climate change
Step 2: Establish the adaptation
objective
Step 3: Survey existing
information and knowledge
Step 4: Identify and engage
stakeholders
Step 5: Identify methodology and
data needs
Step 6: Identify the required
expertise
10
Assessing exposure and vulnerability
Activities
2. Exposure assessment: What
are the current and historical trends
in climate? How is climate projected
to change in the future and in what
ways? How will this affect natural
and human systems of interest?
What are the root causes for
predicted impacts? What
reasonable assumptions
(quantitative and qualitative) can be
made about climate change and its
impacts?
Steps
Step 7: Construct climate
change scenarios
Step 8: Estimate future
biophysical impacts
Step 9: Assign probabilities
to identified impacts
11
Assessing exposure and vulnerability
Many emissions
scenarios (SRES)
Many GCMs
Many downscaling
approaches
www.cccsn.ca/.../Downscaling_html_m5385e5b8.jpg
Assessing exposure and vulnerability
Activities
3. Vulnerability assessment: How
have people historically coped with
heavy rainfall, floods, landslides,
drought, storm surges, and other
weather events? Where are the
most vulnerable areas? Who are the
most vulnerable populations? What
climatic conditions are limiting?
Steps
Step 10: Identify
vulnerabilities
Step 11: Identify biophysical
drivers of vulnerabilities
Step 12: Identify
socioeconomic drivers of
vulnerabilities
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Case study: O MON IV
Description:
O MON IV is a combined cycle gas turbine (CCGT) thermal power
station with a design capacity of 750 megawatt (MW). Under design
conditions the plant has a net efficiency of 56.4% and is expected to
generate 4,500gigawatt hour (GWh) of electricity per year. Fuel supply
will come via pipeline from gas fields in the Gulf of Thailand.
Construction is scheduled to begin in 2013 with the plant expected to
come online in the fourth quarter of 2015.
The O MON IV project is designed for an ambient air temperature of
30°C.
The station represents a $778 million dollar investment.
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Case study: O MON IV
Climate change: Exposure – Impact - Vulnerability
Increasing
air temp
GLOBAL
Changing
precipitation
MEKONG
BASIN
Increasing
flooding
MEKONG DELTA
O MON IV
PROJECT SITE
Exposure
Increasing
water temp
Increasing
erosion
Impact
Vulnerability
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Case study: O MON IV
Direct climate threat
Air temperature
River water temperature
Direct precipitation
Flood depth + Duration
Erosion
Potential sensitivity of a Power plant
Gas turbine cycle performance
Steam turbine cycle + coolant water cycle
performance
Performance of gravity-driven stormwater
management
Asset damage + plant downtime
Asset damage
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Case study: O MON IV
Direct climate threat
Air temperature
River water temperature
Direct precipitation
Flood depth + Duration
Erosion
Potential sensitivity of a Power plant
Gas turbine cycle performance
Steam turbine cycle + coolant water cycle
performance
Performance of gravity-driven stormwater
management
Asset damage + plant downtime
Asset damage
17
Case study: O MON IV
Comparison of Baseline with GCM Projections in the Mekong Delta:
Average Monthly Temperature
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Case study: O MON IV
Comparison of Baseline with GCM Projections in the Mekong Delta:
Total Monthly Precipitation
19
Case study: O MON IV
Frequency Distribution Curves of Daily Temperatures under
Baseline and A2 Climate Change Scenarios
Frequency Distribution
Curves of Daily and max
Temperatures
Change in Plant
Power Output with
Air Temperature
20
Case study: O MON IV
Frequency Distribution
Curves of Average Daily River
Water Temperatures
Relative Efficiency and
Energy Output as a Function
of River Water Temperature
21
Case study: O MON IV
Over the life-cycle of the plant, the combined impacts of climate change
could reduce power output by approximately 827.5GWh over the 25 year
economic design life with effects more severe in later phases of project
operations. Over the design life of the plant this represents a loss in
power output of 0.8 %.
At a nominal electricity purchase price of 6.78 cent/kW, the combined
loss in power output would amount to a reduction in 2040 revenue in
the order of USD 6.73 million. Using a 12% discount rate, the present
value of cumulative lost revenues over the period 2015-2040 amounts
to $9.36 million. If power loss were to follow a linear trend between 2015
and the estimated end value in 2040, then the present value of lost
revenues reaches $18.79 million.
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Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
23
On the economics of climate proofing
Activities
Steps
4. Adaptation assessment: What
adaptation solutions are technically
feasible to address projected
climate vulnerabilities? What are the
costs and benefits of these options?
What are the preferred options in
the context of the project?
Step 13: Identify all potential
adaptation options
Step 14: Conduct
consultations
Step 15: Conduct economic
analysis
Step 16: Prioritize and
select adaptation option(s)
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On the economics of climate proofing
ADAPTATION
Required
adaptation
When adaptation
responds to
complying with
codes and
standards
Cost-effectiveness
analysis
Efficient
adaptation
MRC:
Minimum
navigational
clearance of 37.5 m
for the P05 (5%)
annual flood.
On the economics of climate proofing
ADAPTATION
Required
adaptation
When adaptation
responds to
complying with
codes and
standards
Cost-effectiveness
analysis
Efficient
adaptation
When adaptation is
a choice
Cost-benefit
analysis
On the economics of climate proofing
Changes in the Net Present Value of the
Project as a Result of Climate Change
ΔNPV(P) > 0
ΔNPV(P) < 0
Keep project
in portfolio
Economic analysis of projectlevel climate-proofing options
Corollary: The fact that an
infrastructure is projected to
be adversely impacted by
climate change does not
necessarily imply that
adaptation options must be
implemented.
NPV(CP) > 0
NPV(CP) < 0
NPV(P) > 0
NPV(P) < 0
NPV(P) > 0
NPV(P) < 0
Keep project
in portfolio
with
adaptation
Remove
project from
project
portfolio
Keep project
in portfolio
without
adaptation
Remove
project from
project
portfolio
Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
28
Types of decisions
A menu of climate-proofing decisions:
A1:
Invest
now
A2:
Be ready and invest
later if needed
A3:
Do nothing and invest
later if needed
Types of decisions
A Type 1 decision may be appropriate where:
• 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 (e.g., raising bridge deck); 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 noregret 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 (if any) should
be included in the economic assessment of adaptation options.
Types of decisions
A Type 2 decision may be appropriate where:
• 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.
• Type 2 decisions aim to ensure that a project is climate ready.
Types of decisions
A Type 3 decision may be appropriate where:
• 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. retrofitting) 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.
Both Type 2 and Type 3 decisions may be referred as adaptive
management, consisting of putting in place incremental adaptation
options over the project’s lifetime.
Types of decisions
A menu of climate-proofing decisions:
A1:
Invest
now
A2:
Be ready and invest
later if needed
A3:
Do nothing and invest
later if needed
Bridge in
Bangladesh
Khulna Water
Supply
Most others?
Sea dykes in
Viet Nam
O MON IV
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Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
34
Thought 1
There is no need to adapt cost-benefit analysis to climate change.
The general framework of analysis works just fine.
However, there is a need to do better cost-benefit analysis.
“Cost-benefit analysis is conducted after the decision to go
ahead with the project has been made, which puts the analysis
under considerable pressure to reach conclusions consistent
with the decisions already taken.”
World Bank. 2010. Cost-Benefit Analysis in World Bank Projects.
Thought 2
The greatest difficulty in conducting an economic analysis of a
climate-proofing investment is not with the economics.
The greatest difficulty is with the identification of projected
changes in climate variables, and then of the physical impacts of
these changes on infrastructure. Once these impacts are
quantitatively identified, the economic analysis of climateproofing investment is relatively straightforward.
As is ALWAYS the case, the economic analysis of an investment
project is a multi-disciplinary exercise which requires the inputs
of multiple experts and which is conducted in a context of
uncertainty.
Thought 3
The type of (simplistic) sensitivity analysis typically conducted in
an economic analysis is inappropriate to deal with the uncertainty
associated with climate change.
There is a need to be considerably more sophisticated with the
conduct of economic analysis (e.g. Monte Carlo simulation) to
estimate not only the expected NPV of a project but to estimate
the probability distribution of that NPV, and assess the risk (the
probability) and circumstances under which the project NPV may
be negative.
Thought 4
We should not confuse the economics of climate-proofing with
the financing of climate-proofing.
Economics of climate-proofing: Is it good for society to invest in
climate-proofing?
Financing of climate-proofing: If it is good for society, then where
will the money come from?
Thought 5
There is a great temptation to increase the capital costs of
infrastructure projects to account for climate change by some
standardized “climate change adaptation coefficients” (for
example, 10%).
This temptation should be avoided. Adaptation options and costs
are specific to local circumstances and technologies.
Thought 6
International financial institutions require that specific discount
rates be used to calculate the present value of costs and benefits.
Given the required level of these discount rates (World Bank
requires the use of 10%; ADB requires the use of 12%), climate
change may not really matter (unless the impacts are very large
and expected relatively soon).
Outline of Presentation
1. On the meaning of “climate-proofing”
2. Costs of climate change vs. benefits of climate-proofing
3. Climate-proofing investments
3.1 Assessing exposure and vulnerability
3.2 On the economics of climate- proofing
3.3 Types of decisions
4. Some thoughts on the nature of the economics of climate
proofing investment projects
5. Further resources
41
Further Information
All reports available at:
http://www.adb.org/climate-change
For more information, please contact Mr. Charles Rodgers:
[email protected]
On the Economics of Climate-Proofing
Infrastructure Investment Projects
Presentation by Dr. Benoit Laplante
Environmental Economist
Consultant
Asian Development Bank
March 12, 2013