The use of new economic decision support tools for adaptation assessment: a review of methods and applications, towards guidance on applicability

There is a growing focus on the economics of adaptation as policy moves from theory to practice. However, the techniques commonly used in economic appraisal have limitations in coping with climate change uncertainty. While decision making under uncertainty has gained prominence, economic appraisal of adaptation still uses approaches such as deterministic cost-benefit analysis. Against this background, this paper provides a critical review and assessment of existing economic decision support tools (cost-benefit analysis and cost-effectiveness analysis) an uncertainty framework (iterative risk management) and alternative tools that more fully incorporate uncertainty (real options analysis, robust decision making and portfolio analysis). The paper summarises each method, provides examples, and assesses their strengths and weaknesses for adaptation. The tools are then compared to identify key differences, and to identify when these approaches might be appropriate for specific applications in adaptation decision making.