Presentation Title

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Cost Benefit Analysis of an Agricultural Adaptation (Irrigation) to Climate Change

Agha Akram Yale University

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Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

“The prices of staple foods are at near historic lows, and stockpiles are adequate. This is a situation that would be inconceivable without the last half-century's investments in irrigation.”

“Irrigation is the largest recipient of public agricultural investment in the developing world.”

(World Bank (1995)

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Irrigation as an Adaptation to Climate Change

Climate change affects temperature and precipitation among other climate phenomena.

Changes in the hydrological cycle will be some of the most obvious changes that will affect agriculture.

Irrigation systems are a way to adapt to changes in the hydrologic cycle (especially changes in the quantity and timing of precipitation).

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Cost Benefit Analysis

Determine the cost of implementing a project and the benefits it accrues.

Often, benefits (and sometimes costs) arrive over a period of time (“stream of benefits”).

Difficult but useful to consider externalities – we must account for the complete set of costs and benefits including costs not in the budget and impacts not paid for in the market.

- this can be difficult; might require non-market valuation techniques.

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Senegal Irrigation Project

Nianga Irrigation Pilot Project (NIPP).

Life-span of about 30 years.

One of the analyses of this project provided a very clear schedule of costs and benefits.

Measured in thousands of 1975 CFA Francs (Senegalese currency)* Weiler, Edward M. and Wallace E. Tyner (1981). Social Cost-Benefit Analysis of the Nianga Irrigation Pilot Project, Senegal. The Journal of Developing Areas , Vol. 15, No. 4 (Jul., 1981), pp. 655-670.

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Cost and Benefit Stream of NIPP

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Should we go ahead with this project?

We need to determine if the total benefits exceed the total costs.

If benefits > costs then the project is worth doing.

However, need to think through a small but important issue: discounting.

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Discounting the Future

We need to convert future values into a present value.

To do this we discount the future back to the present.

Why? Because: money today is worth more than money tomorrow.

The discount rate is a product of society’s time value of money (composed of the pure rate of time preference and the goods

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Present Value

Use this formula to convert all future values to present values:

PV = FVt/(1 + r)t

Where PV is present value, FV is future value, r is the discount rate and t is time.

Using this we see the following stream of benefits and costs for NIPP…

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Result

Year Period

Total Agricultural

Benefits Total Cost

Benefits without Project

Net Benefits

Discount Rate PV(TB) 5% PV(TC) 5%

BC Ratio

1973 0 0.0 31,320.7 7,248.0 -38,568.7 0.05 0.0 31320.7 .

1974 1 0.0 354,174.0 7,248.0 -361,422.0 0.05 0.0 337308.571 .

1975 2 43,781.3 512,089.9 7,248.0 -475,556.6 0.05 39710.9 464480.635 .

1976 3 157,552.7 124,573.8 7,248.0 25,730.9 0.05 136099.9 107611.532 .

1977 4 164,809.6 144,853.9 7,248.0 12,707.7 0.05 135589.3 119171.662 .

… … … …. … …. … … … …

1998 25 215,364.2 113,642.0 7,248.0 94,474.2 0.05 63597.6 33558.7976 .

1999 26 215,364.2 113,642.0 7,248.0 94,474.2 0.05 60569.2 31960.7596 .

2000 27 215,364.2 113,642.0 7,248.0 94,474.2 0.05 57684.9 30438.8187 .

2001 28 215,364.2 113,642.0 7,248.0 94,474.2 0.05 54938.0 28989.3511 .

2002 29 215,364.2 113,642.0 7,248.0 94,474.2 0.05 52321.9 27608.9058 .

Sum: 2,746,329.56 2,490,685.93 1.10

PV of TB: 2,746,329.56PV of TC: 2,490,685.93BC Ratio: 1.10

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Graph over Time: No Discounting and Discounting

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Agricultural Productivity and Climate Change

Benefits in NIPP are those of agricultural output (rice and tomatoes)

What if future climate change reduces the possible output?

This will require careful study – farmers may adapt their crop and input choice to a changed climate.

For the moment, let’s make some simple assumptions:

50% chance that climate change induces a 25% decline in agricultural revenues per year.

50% chance that climate change induces a 25% increase in agricultural revenues per year.This change comes about in the 15th year of the project.

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Graph over Time: High, Low and Expected Benefits with Climate Damages

Result: E(B)/C = 1.10264 But,

BH/C = 1.226883

BL/C = 0.978396

Capacity Building Programme on the Economics of AdaptationSupporting National/Sub-National Adaptation Planning and Action

Scenario: High Benefits with Climate Damages

Result: BH/C = 1.35