Approaches in economic evaluation of climate change adaptation

Besides the accelerating and pressing impacts of climate change on ecosystems and environment, it has wide-ranging impacts across multiple sectors, affecting society and economy. Effective adaptation requires systematic evaluation of its impacts and alternative strategies. Socio-economic parameters provide diverse kinds of impact distributions in the long-term and can guide finding the optimal (e.g. in euros, in losses of lives etc.) adaptation strategy for a specific sector. An integral part of these assessments is evaluating the future socio-economic losses caused by climate change and its extensive societal effects. This paper introduces a preliminary economic frameworks aimed at evaluating the impacts generated by different kind of resilience solutions.

Economic evaluation frameworks, e.g., cost-effectiveness analysis (CEA), cost-benefit analysis (CBA), multi-criteria analysis (MCA) or value-chain analysis (VCA) can be used to assess which resilience solution is the most effective and what the cost is if no action is taken. For example, the objective could be to compare different resilience solutions addressing urban heat island effect in a given location to support selecting the most suitable option. Here cost-benefit analysis (CBA) could be applied, which provides a systematic approach to assess the socio-economic performance of each resilience solution, considering their benefits and costs, including both costs of its production and implementation. Conversely, MCA can be used to link environmental, economic, and social systems under different climate scenarios. Incorporating non-market valuation methods (e.g., contingent valuation, hedonic pricing) ensures that intangible effects such as ecosystem degradation or health impacts are also represented in the analysis in comparable terms. Yet, these methods come with their shortcomings, including the difficulty of capturing non-market benefits quantitatively, that should be stated clearly when presenting the results. Further, assessing the distributional effects of climate impacts – how costs and benefits differ across regions, income groups, or generations – is crucial for equitable adaptation policy. Integrating uncertainty analysis and discounting of future impacts plays a key role in translating long-term climate risks into present economic values.

Use of economic evaluation methods offers a structured way to evaluate different resilience solutions in adaptation-related decision-making. Economic evaluation frameworks allow for including societal impacts (benefits and costs) into economic evaluations which ensures that overall well-being and long-term societal effects are considered in the decision-making process. Moreover, economic evaluation allows for comparing different alternatives in monetary or non-monetary terms, which again enable prioritisation of adaptation strategies and assessment of trade-offs between different impacts. Furthermore, including co-benefits such as improved health, job creation, and ecosystem resilience highlights the broader economic rationale for proactive climate adaptation. While the economic approach provides valuable information for decision-makers on how to allocate resources most efficiently, it is always essential to acknowledge the constraints of economic analysis, especially when evaluating qualitative or intangible impacts. For example, altruistic value generated through implementing resilience solutions that is targeted for the most vulnerable groups cannot be captured in quantified, monetary terms, nor can the value of biodiversity be determined for future generations.