Cost Effectiveness Analysis

Submitted by Michael Rastall | published 18th Nov 2013 | last updated 15th Jun 2018
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There is increasing interest in the appraisal of options, as adaptation moves from theory to practice. In response, a number of existing and new decision support tools are being considered, including methods that address uncertainty.

One of the tools that has been widely applied to climate change mitigation, and is also being considered for adaptation, is Cost Effectiveness Analysis (CEA). CEA can be used to compare and rank the relative attractiveness of different options, and to identify the least cost combination of options to achieve pre-defined targets using cost curves.

Key Messages​

  • CEA has been widely used in climate change mitigation. However, the MEDITION review highlights the application to adaptation is much more challenging. This is because adaptation is a response to many local, regional or national level impacts, rather than to a single global burden, i.e. there is no single common metric. The application of CEA to adaptation is therefore much more demanding, in terms of analysis detail and resources.
  • A key issue for CEA is the choice of costeffectiveness metrics. The MEDIATION review has identified a set of potential metrics by sector, however, it is stressed it can be difficult to pick these, especially when considering complex or cross-sectoral risks.
  • Further, most applications of CEA do not consider uncertainty, working with single cost curves. However, the use of central estimates for future climate change is not recommended. For adaptation, uncertainty has the potential to alter the ranking of options and the overall cost curve, and thus needs consideration.
  • The review has considered the strengths and weakness of the approach for adaptation.
  • The key strength of CEA is that it avoids valuation of economic benefits, and can thus be used where valuation is difficult or contentious (e.g. ecosystems). The approach is also relatively easy to apply, and the results are concise and easy to understand.
  • The potential weaknesses relate to the use of a single common metric and the consideration of uncertainty, both critical issues for adaptation. Further, CEA tends to focus on technical options, and often omits capacity building and non-technical options, while the linear sequencing adopted contradicts the adaptation focus on portfolios of options and inter-linkages.
  • Previous applications of CEA to adaptation have been reviewed, and a case study is presented for the biodiversity in Finland.
  • The review and case studies provide useful information on the types of adaptation problem types where CEA might be appropriate, as well as data needs, resource requirements and good practice lessons. 
  • The review identifies CEA is most useful for near-term assessment, particularly for identifying low and no regret options, in areas where monetary valuation is difficult. It is most applicable where there is a clear headline indicator and where climate uncertainty is low.
  • A number of good practice lessons are highlighted. The most important of these are to ensure that adaptation CEA does not focus only on technical options, and that it considers uncertainty through multiple cost curve analysis. Furthermore, the need to consider all attributes of options is highlighted. Finally, it is considered good practice to undertake CEA within an iterative plan, to capture enabling steps, portfolios and inter-linkages, rather than using the outputs as a simple technical prioritisation.

Suggested Citation

Watkiss, P. and Hunt, A. (2012). Cost- effectiveness analysis:: Decision Support Methods for Adaptation, MEDIATION Project, Briefing Note 2. 

The research leading to these results has received funding from the European Community's Seventh Framework Programme (FP7/2007-2013) under grant agreement no. 244012.