Climate Change Risks and Adaptation
Pragmatic cost–benefit analysis for infrastructure resilience
Organisations including the World Bank, the OECD, the UK’s National Infrastructure Commission, and Infrastructure Australia emphasise the importance of considering resilience in infrastructure business case assessment – investing in more resilient infrastructure is robust, profitable, and urgent and its benefits can greatly outweigh repair and reconstruction costs. Internationally, infrastructure agencies also recognise that to properly value resilience, improved approaches to cost-benefit analysis are needed. This true for the numerous day-to-day infrastructure decisions about local roads and bridges, power transformers, and drainage culverts just as it is for the few multi-billion-dollar investments where intensive state-of-the-art decision analysis is feasible.
This article in Nature Climate Change identifies four simple adjustments to the application of cost-benefit analysis for infrastructure decisions that would greatly improve decision-making for future infrastructure resilience:
- Reframe mindsets and culture to focus on ‘assets in context’, rather than the asset itself. Frame the decision context to consider the integral role of infrastructure in the social, economic, and environmental systems that influence the resilience of communities and economies, instead of narrowly focusing on managing risks to infrastructure assets.
- Consider a wide range of scenarios when exploring infrastructure options and assessing outcomes. Use exploratory scenarios to:
- Design and choose robust infrastructure options that support good outcomes across the range of plausible exploratory scenarios
- Test options to ensure that decisions are robust across possible futures and that residual vulnerabilities are manageable
- Identify opportunities to build resilience for low-probability, high-consequence events and support the development of contingency and business continuity plans
- Account for the benefits and value created by investing in adaptation and resilience, not just the future costs avoided by risk mitigation. Strengthen the case for resilience investment:
- Pay attention to the contribution of infrastructure to the resilience of the systems it supports
- Identify opportunities for climate adaptation to create value for a wider set of beneficiaries
- Monetize some values as potential financing or revenue streams where appropriate
- Always report the sensitivity to discount rates. Update business case development and procurement procedures to include sensitivity analyses with low or zero discount rates, or a declining rate. This is important because it adds transparency to infrastructure decisions with long-term consequences such as path dependency, future repair costs, and consequences for future generations.
See “Pragmatic cost-benefit analysis for infrastructure resilience” or contact Dr Russell Wise for more information.
Exploring climate risk in Australia: The economic implications of a delayed transition to net zero emissions
Climate risk is a dynamic and complex issue. This project assesses the transition risk and the potential economic consequences of rising global emissions, as well as presenting a view of an alternative future where net zero emissions targets are achieved by mid-century. It also considers limited impacts of physical climate risk i.e. the impact of chronic temperature increase on productivity. The results highlight the transition challenge facing Australia. Our key economic exports, which derive from emissions-intensive industries with hard-to-abate emissions sources (mining, manufacturing, and agriculture), are expected to decline and these same industries are also highly exposed to physical risk. However, these impacts could be mitigated. Higher short-term decarbonisation targets coupled with domestic policy certainty could assist to smooth the transition, avoid shocks, allow coordinated transition plans to be developed for the most vulnerable industries, and enable higher confidence to attract investment in emerging low emissions industries and technologies.
Real Options Analysis and Climate Adaptation
This project used transects across space as analogues for future climate scenarios. Farmers’ decisions, as much as a changing climate, determine how agriculture will be transformed by climate change. The real options decision framework, ‘Real Options for Adaptive Decisions’ (ROADs), was used to investigate how uncertainties about the climate affect the adaptation and transformation of agricultural systems.
Climate changes can drive substantial changes to agricultural systems that require new investments and infrastructure and can leave some assets stranded. Real options analysis extends traditional economic analyses of agricultural investment decisions based on net present values to better represent incomplete knowledge and uncertainty. The results of a case study of the pathways farmers might follow in South Australia as their industries are transformed in response to climate change was published in the Australian Journal of Agricultural and Resource Economics.