Climate Change Risks and Adaptation: Linking Policy and Economics

Submitted by Julia Barrott 11th September 2015 10:46
oecd - climate change risks and adaptation pic - climate adaptation.

Overview

This OECD report is intended as a guide for policy makers to better identify, characterise and address climate risks, helping them mainstream adaptation into decision making by taking into account a range of uncertainties. These measures should help inform policies, prioritise scarce resources and unlock sufficient finance for adaptation. 

The report takes stock of adaptation efforts in OECD countries to date, and points to where renewed efforts will be required. It underscores the message that successfully preparing for the changes brought by future climate change will also entail looking beyond monetary valuation and ensuring that the expectations and needs of affected communities are taken into account. 

Recognising the many challenges climate change brings, and building on previous OECD analysis and countries’ experiences, this publication proposes an iterative process for managing the risks from climate change: 

  • Identifying risks: Undertaking research and consultation to identify the range of potentially relevant risks that could arise from climate change.
  • Characterising risks: Risks can be monitored, reduced, transferred or absorbed depending upon their characteristics. The appropriate responses will depend upon factors including the likely severity of consequences, the likelihood of the risk occurring, socio- economic consideration to address the risks, and the projected evolution of the risk. New decision-making approaches, such as real options analysis, can help to inform policy choices, as well as the design and financing of infrastructure.
  • Choosing and exploring policy responses: New policies, or reforms to existing interventions, may be required to ensure that risks are reduced or transferred as appropriate. This can include early action to integrate adaptation into current decisions, or activities with long lifetimes, such as infrastructure or land use planning.
  • Feedback and learning: On-going monitoring and regular evaluation can help to ensure that risk management measures are on track, implement adjustments if required and identify newly-emerging risks. 

Barriers to adaptation

Barriers or constraints to adaptation are factors that make it harder to plan and implement adaptation actions (IPCC, 2014). Barriers will make adaptation less efficient or less effective. Alternatively, they may require changes that lead to missed opportunities or higher costs (Moser and Ekstrom, 2010). In 2013, the UK government in its National Adaptation Programme identified the main barriers to socially efficient adaptation as market failures, policy failures, governance failures and behavioural barriers (HMG, 2013b):

  • Market failures can occur e.g. due to lack of information, the presence of externalities and public goods, information asymmetry and misaligned incentives. Economic theory applied to adaptation (e.g. Fankhauser, Smith and Tol, 1999; Mendhelson, 2000; Cimato and Mullan, 2010), as well as empirical observations (Mendelsohn, 2000; Osberghaus et al., 2010a; Wing and Fisher-Vanden, 2013) indicate that such actions will not receive appropriate levels of private investment. For example, Lee and Thornsbury (2010) point out that under different market structures (monopoly, oligopoly or perfect competition), the ability of investors to reap the benefits of adaptation will vary, and therefore also their incentives to invest in it.
  • Policy failures occur when conflicting policy objectives co-exist (which is often) and there are not appropriate mechanisms for addressing these trade-offs (Frontier Economics, 2013). For example, urban development objectives may not take into account the vulnerability of assets and human systems to climatic stresses. Also, when policies result in market distortions (e.g. price or income subsidies), people will under- or over-adapt depending on how their adaptation choices will translate into income changes (Fankhauser, Smith and Tol, 1999).
  • Governance failures refer to ineffective institutional decision-making processes, e.g. when the current structure of institutions and regulatory policies is poorly aligned to account for adaptation objectives (Craig, 2010; Spies, 2010; Stillwell et al., 2010; Stuart-Hill and Schulze, 2011; Eisenack and Stecker; 2012; Huntjens et al., 2012; Herrfahrdt-Pähle, 2013). Adaptation typically requires multiple actors and institutions with different objectives, jurisdictional authority and levels of power and resources. The complexities of governance networks can constrain adaptation (see Klein et al., 2014). Overlapping mandates of government entities tend to create conflicts and slow adaptive responses. Further, lengthy bureaucratic processes and lack of transparency are an impediment to fiscal planning and access to finance, particularly relevant for developing countries (Setz et al., 2008). Poor – or lack of – leadership (Moser and Ekstrom, 2010), lack of a clear mandate, and the short-term political cycle can also represent barriers to effective decision making (Lehmann et al., 2012). Corruption within institutions also undermines adaptation efforts (Lesnikowski et al., 2013; Schilling et al., 2012).
  • Behavioural barriers are concerned with the observed inability of individuals to take what appear to be rational decisions (i.e. to maximize their net benefits or utilities) and with their cognitive limitation in attempting to achieve their goals. This limitation manifests itself as inertia, procrastination, and the use of time-inconsistent discounting (see Simon, 1999; Jones, 1999; Cimato and Mullan, 2010). Social values and beliefs can also support or hamper adaptation (Jones and Boyd, 2011; Stafford-Smith et al., 2011; Adger et al., 2012) in so far as they frame how societies develop rules and institutions to govern risk, and to manage social change and the allocation of scarce resources (Ostrom, 2005).

Further, individuals, institutions and the natural environment will clearly adapt within the boundaries of their adaptive capacity (see Oberlack and Neumarker, 2011; Stern, 2006; Kuch and Gigli, 2007; Osberghaus et al., 2010b; Hallegatte, Lecocq and de Perthuis, 2011), and physical and biological constraints. Gender, age, education, access to infrastructure and finance, and access to markets and technology are all elements that determine the adaptive capacity of social systems. Natural systems’ ability to adapt will be possible within certain climatic thresholds, and can be hampered by other non-climatic stresses (Klein et al, 2014; Cimato and Mullan, 2010), and the presence of physical barriers (e.g. the lack of corridors for species migration).

Key Messages

Risks in a changing climate:

  • Climate change is creating new risks and exacerbating existing ones. Ecosystems will shift, food production placed under increasing pressure and some types of extreme weather events will increase in frequency and severity. As global temperatures rise, the likelihood of encountering potentially catastrophic changes increases.
  • Flexible, iterative risk management approaches can support decision making given uncertainty about the future. This is vital since the characteristics of climate risks are determined by complex, and often unpredictable, interactions between economic, social and environmental systems.
  • Progress needs to be made on three fronts to address the risks from climate change: reducing greenhouse gas emissions; supporting risk reduction activities; and enhancing mechanisms to transfer and share risks. 

Approaches to managing climate risks:

  • Integrating adaptation into decision making requires aligning political will, strengthening institutional arrangements and applying appropriate economic tools.
  • National governments have a crucial role to play in supporting adaptation by households, businesses and local administrations. Key areas for achieving this include: providing access to information, tools and guidance; ensuring that regulations are coherent and avoid perverse incentives; addressing social drivers of vulnerability; and considering climate risks when making funding decisions.
  • Monitoring and evaluation will be essential to assess the effectiveness of countries’ approaches to adaptation, identify emerging risks and respond to changing policy contexts. National strategies for adaptation have been adopted by 24 OECD countries, but the development of strategies for measuring progress remains at an early stage for most of them. 

Overview of costs and benefits of adaptation at the national and regional scale:

  • The information base on the costs and benefits of adaptation has significantly evolved in recent years. It has moved beyond the previous focus on coastal areas to include water management, floods, agriculture and the built environment. However, gaps remain for ecosystems and business, services and industry.
  • The methods for identifying options and assessing costs and benefits are also changing. There is an increasing use of new approaches that aim to support decision making under uncertainty, and a focus on early low-regret options. This leads to a different suite of options, including a focus on capacity building and non-technical options, and differences in the timing and phasing of options.
  • Improved information is also available on the aggregate costs of adaptation. Recent implementation and policy orientated studies indicate higher costs than the previous review, because of existing policy objectives and standards, the need to consider multiple risks and uncertainty, and additional opportunity and transaction costs associated with policy implementation.
  • While important gaps exist in the empirical evidence, and there are issues of transferability and the limits of adaptation, the new evidence base provides an increased opportunity for sharing information and good practice. 

Framing risk-based approaches to adaptation planning:

  • There are four stages to applying a risk-based approach (see Figure 4.1 below): i) identifying relevant risks, ii) characterising those risks, iii) choosing and exploring policy options to address the risks, and iv) providing feedback to respond to evolving risks through an iterative process.
  • Identifying and characterising risks require both quantitative information and qualitative judgements. The acceptability of different risks will depend upon context and value judgements, which make it essential to have a transparent and inclusive process of stakeholder engagement.
  • Methodologies used to characterise risks in one sector will not necessarily be suitable for others. Tools such as systems mapping and horizon scanning can assist with understanding risks that are complex or highly uncertain.
  • Feedback and learning mechanisms should be considered from the outset when applying a risk-based approach. Building in flexibility at the outset of applying a risk-based approach, and responding to changing information, can reduce costs and enhance effectiveness. 

Figure 4.1: Four steps in a risk-based approach
Figure 4.1 from p.79 of the report

Financing adaptation in OECD countries:

  • Climate risks will have direct financial implications for governments, but also give rise to indirect effects. The development of financing strategies, linking risk reduction and risk transfer, can help to ensure an efficient response and clarify expectations.
  • Data on the costs of climate risks are limited, which can inhibit adaptation planning. A better understanding of the fiscal impact of climate risks – damage to assets, compensation payments, reduction in tax revenues – would support risk management. Identifying and reporting potential contingent liabilities from climate change could inform measures to address those liabilities
  • Governments can, and need to, play a significant role at various levels (i.e. national, sub-national and sectoral) in enabling finance for adaptation, both directly through public sector expenditures, and indirectly by facilitating private sector action. 

Tools to mainstream adaptation into decision-making processes:

  • Mainstreaming requires the integration of adaptation into existing processes and decision cycles. This recognises that adaptation will often be one of many policy objectives, and not necessarily the dominant one. It also requires the identification of suitable entry points in the policy process for introducing mainstreaming, noting these will differ across sectors and national contexts.
  • To effectively mainstream adaptation, there is a need for pragmatism, capacity building and support for considering climate risks. Success will often be contingent on the timing of such mainstreaming measures and the stage at which they are considered during the decision-making process.
  • With greater mainstreaming, adaptation will be further integrated into existing appraisal processes. However, adaptation involves some challenges for existing methods, due to the high uncertainty involved. A suite of new decision support tools have therefore emerged that can assist better decision-making under climate change uncertainty (see Figure 6.3 below).
  • These new methods for decision-making can be resource-intensive and complex to use. These have many potential applications for major policy initiatives and investments. To support mainstreaming, the priority is to develop “light-touch” approaches that capture the core concepts of these new methods while balancing pragmatism with economic rigour. 

Figure 6.3: Decision support tools for adaptation
Figure 6.3 from p.130 of the report.

Authors

This OECD report (except for Chapters 3 and 6) was written by Michael Mullan, Takayoshi Kato, Nicolina Lamhauge and Jennifer Helgeson, under the supervision of Simon Buckle. It benefitted from substantive contributions by Britta Labuhn, Mikaela Rambali, Darina Petrova and Lola Vallejo. Chapter 3 was written by Paul Watkiss, Alistair Hunt, Josselin Rouillard, Jenny Troeltzsch and Manuel Lago. Contributors to that chapter are: Jeroen Aerts, Anne Biewald, Francesco Bosello, Aline Chiabai, Areti Kontogianni, Ekko van Ierland, Ibon Galarraga, Petr Havlik, Onno Kuik, Reinhard Mechler, Elisa Sainz de Murieta, Paolo Scussolini and Michalis Skourtos. Chapter 6 was written by Alistair Hunt and Paul Watkiss and benefitted from contributions by Federica Cimato. 

Suggested Citation

OECD (2015), Climate Change Risks and Adaptation: Linking Policy and Economic, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264234611-en