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Climate pp 169–192Cite as

Uncertainties in the Cost-Benefit Analysis of Adaptation Measures, and Consequences for Decision Making

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Abstract

In the early stages of rebuilding New Orleans, a decision has to be made on the level of flood protection the city should implement. Such decisions are usually based on cost-benefit analyses (CBAs). But in suchs an analysis, the results are contingent on a number of underlying assumptions and varying these assumptions can lead to different recommendations. Indeed, though a standard first-order analysis rules out Category 5 hurricane protection, taking into account climate change and other human-related disruptions of environment, second-order impacts of large-scale disasters, possible changes in the discount rate, risk aversion, and damage heterogeneity may make such hurricane protection a rational investment, even though countervailing risks and moral hazard issues reduce benefits. These results stress the high sensitivity of the CBA recommendation to several uncertain assumptions, highlight the importance of second-order costs and damage heterogeneity in welfare losses, and show how climate change creates an additional layer of uncertainty in infrastructure design that increases the probability of either under-adaptation (and increased risk) or over-adaptation (and sunk costs). In such a situation, alternative decision-making approaches should be favored. This paper suggests several strategies that are especially robust to uncertainty and that should be preferred in the current context of high uncertainty on future climate conditions.

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Notes

  1. 1.

    It is assumed that protection systems have an infinite lifetime, after having checked that results were only weakly sensitive to the protection system lifetime, chosen in a reasonable range, for the selected values of the parameters. Indeed, as we will see, if δ  ≈  g, where g is the economic growth rate (see below), the system lifetime becomes an important variable.

  2. 2.

    Note that the losses due to the New Orleans flooding were only a fraction of the total cost of the Katrina landfall.

  3. 3.

    In case of a repetition of the Katrina’s scenario, a better evacuation would probably avoid a large part of the human losses and reduce this amount of damages. It has to be mentioned, however, (i) that Katrina’s track forecasts have been very good and allowed for anticipated decisions before landfall, which is not always possible, and (ii) that an evacuation is always subject to organizational problems and unexpected practical difficulties, making the human part of the damages highly variable and uncertain.

  4. 4.

    An annual probability of 1/500 means that there is a 20% chance of a Category 5 hurricane hitting New Orleans in the next 100 years, and a 33% chance in the next 200 years.

  5. 5.

    Among the necessary assumptions in the CBA, it is often useful to distinguish between the political choices that must arise from a political process (e.g., discounting scheme), and the scientific uncertainties that can be —at least theoretically—solved through additional research (e.g., future probability of occurrence).

  6. 6.

    For instance, Tierney [63] finds that data on the consequences of the 1993 Midwest floods and the 1994 Northridge earthquake suggest that “business properties may escape direct damage and yet suffer extensive disruption as a result of lifeline service outages.” These short-term costs, however, are usually included in insurance industry assessments as “business interruption” costs.

  7. 7.

    Examples of such countervailing risks in flood management are provided by Glenn et al. [19] or Christensen [11].

  8. 8.

    In other terms, the existence of the protection system is assumed to increase economic growth in the protected area by 0.5% per year, making it equal to nationwide economic growth.

  9. 9.

    This is especially true if improved track forecasts, warning systems, and evacuation plans can avoid human losses at low cost.

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Acknowledgement

The author is grateful to Philippe Ambrosi, Hans-Martin Füssel, François Gusdorf, Minh Ha-Duong, Robert Hahn, Mike Jackson, Mike Mastrandrea and Jonathan Wiener for very useful suggestions and advice on a previous version of this article. This research is supported by the European Community’s Seventh Framework Programme (FP7/2007-2013), ConHaz project, Contract no 244159.

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  1. Centre International de Recherche sur l’Environnement et le Développement, and Ecole Nationale de la Météorologie, Météo-France, Paris, France

    S. Hallegatte

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  1. US Army Corps of Engineers, Virginia Rd. 696, Concord, 01742, USA

    Igor Linkov

  2. US Army Engin. Research & Developm. Ctr., Halls Ferry Road 3909, Vicksburg, 39180-6199, USA

    Todd S. Bridges

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Hallegatte, S. (2011). Uncertainties in the Cost-Benefit Analysis of Adaptation Measures, and Consequences for Decision Making. In: Linkov, I., Bridges, T. (eds) Climate. NATO Science for Peace and Security Series C: Environmental Security. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-1770-1_10

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