Overview
(Week 7)
Basic cost-benefit analysis of a climate adaptation initiative has some serious limitations. Given the complexity not only of climate systems, but also of social, political and economic systems, the probability of future risks and opportunities cannot be reliably predicted based on past experience. It is difficult to predict the extent to which our organizations, suppliers, customers and public infrastructure will be exposed to climate change. And, as the effects of climate change become increasingly pronounced, it becomes difficult to predict the responses of regulators, business affiliates, and consumers. The methods introduced in Unit 4 to estimate uncertain costs and benefits were based on expected probabilities, but probability estimates are unreliable when applied to complex systems.
In this unit you’ll explore two procedures used to address this deep uncertainty in cost-benefit analysis: sensitivity analysis and scenario analysis. Sensitivity analysis involves intentionally varying the value of one or more of the parameters of the cost-benefit model (e.g., risk probabilities, costs of production inputs, or level of consumer demand) in order to determine the boundaries within which the results of the cost-benefit analysis remain valid.
Similarly, with scenario analysis, the value of key parameters of the cost-benefit model are varied to align with values expected under each scenario. Through this process, the analyst can determine the range of scenarios under which the results cost-benefit analysis remain valid.
You’ll apply these procedures to the cost-benefit analysis you developed in Unit 6 in order to assess the robustness of your analysis to changes in assumptions (e.g., regarding the probability of loss events). You’ll build scenarios based on Intergovernmental Panel on Climate Change (IPCC) Representative Concentration Pathways to “stress test” your cost-benefit analysis.
Activities and Assessment
- Online session
- Readings and independent exploration
- Practice exercises and team problem solving
- Analysis workbook #4: Uncertainty (Assignment 2)