We provide two ‘methods’ pieces on the application of valuation methods:

• Real options for coastal adaptation
• Comparing costs and benefits of climate adaptation

CoastAdapt provides two case studies that describe the application of a third valuation method: Multi-Criteria Analysis. These are:

• The Sydney Coastal Councils Group experience: prioritising coastal adaptation options at the local level
• Kakadu – Vulnerability to climate change impacts

In addition, the snapshot AdaptWater:  A climate change adaptation tool for the urban water industry describes an application of cost-benefit analysis.

Introduction

Adaptation decision-making is characterised by uncertainty.  This uncertainty challenges many traditional valuation tools, which lack the sophistication to deal with the uneven distribution of costs and benefits over time. This guide aims to assist the reader step through the process of choosing valuation approaches that are fit for the purpose of the adaptation decision.

The tools discussed here are exactly that—tools to support decision-making. No tool is perfect, each has advantages depending on how and to what end it is used. Many of the tools are complementary in nature and can be used sequentially and iteratively as an adaptation pathway (see Pathways approach) is developed and refined over time. Some examples are described below to illustrate this.

Adaptation decision-making tends to follow an iterative process that is based on the principles of adaptive management (see Figure 1). This enables decision-makers to take into account the range of uncertainties related to future states (see Understanding climate scenarios). The starting point for a valuation study is generally not the same as the starting point for a decision. As Figure 1 illustrates, valuation studies form part of the cycle of decision-making. Choosing a fit-for-purpose valuation method depends heavily on the decision-making context, the level of uncertainty present, and the requirements for stakeholder engagement.

This guidance assumes that the reader has identified that there is a problem of significance that needs to be addressed through adaptation measures. In other words, the identification of challenges (i.e. context setting) and the determination of vulnerabilities (i.e. gathering of information on all risks) will already have been undertaken to some extent before commencing a valuation study. If you are using the C-CADS model (Figure 1), we assume here that you have completed the first step of C-CADS (Figure 1) and made a start on the second step of C-CADS.  This guide can be used independently of C-CADS.

Commencing a valuation study

When framing and undertaking a valuation exercise, you need to begin with two questions.

1. Do I have all the information I need in the right form and quality to proceed?
2. Can all values be monetised (and should they)?

Do I have the right information to proceed?

Information is valuable, however, it often comes at a cost and may be limited at the time a decision needs to be made. Careful thought should be given to the costs and benefits of seeking new information (the reader is referred to the Information Manual 4: Cost and benefit for a more detailed discussion on this). The type, time and quality of information will underpin the quality of inputs to any valuation exercise. Gorddard et al. (2015) propose an approach to help frame the questions that need to be asked, the Values-Rules-Knowledge framework.

• Values type questions might be:
  • Is there broad consensus on the vision?
  • Is there agreement across stakeholder groups on options?
• Rules type questions might be:
  • Are roles and responsibilities clearly defined?
• Knowledge type questions might centre on:
  • Is there certainty of knowledge relating to existing hazards?
  • Is there certainty of knowledge relating to future hazards / risks?

At the broadest level, determining where a decision point rests across these three axes (Figure 2) can indicate what level of detail is appropriate for a valuation study, and where to start (see Table 1). For example, if there is significant community conflict over the nature of a proposed solution (e.g. protect or retreat), or if there is a high knowledge deficit (dots 1 and 2 in Figure 2), then more work on knowledge and community values is needed before a valuation study can begin. In fact, the introduction of a Cost-Benefit Analysis (CBA) at such a time may entrench polarised views rather than resolve any differences. However, if there is good knowledge, values are aligned and the regulatory framework is clear, then valuation studies are appropriate and can assist decision-making.

When scaled out to the future, and then brought back to net present values, relatively small changes in assumptions can impact the results of valuation studies. Where lack of knowledge about future states (e.g. future climate, future property prices etc.) is a feature of a valuation study then sensitivity analyses (see Using climate scenarios) can help to investigate the consequences of changes and errors in parameter values and assumptions (see Information Manual 4: Costs and benefits).

Can all values be monetised (and should they)?

Goods and services that are traded in the market can generally be monetised directly or approximate monetary values can be derived through a number of different approaches and low-cost methods such as asset replacement cost and benefit transfer (see Table 2). A number of approaches have also been developed to generate monetary values for non-traded goods and services and for which no proxy value is readily available. Such tools depend on either revealed or stated preferences (also known as contingent valuation) being elicited from a set of users. With revealed preference or indirect valuation methods, the value of a non-traded good or service is determined by the creation of a parallel or surrogate market. Commonly used tools include the Travel Cost Method and Hedonic Pricing. With stated preference or direct valuation methods, a set of people are directly asked about their willingness to pay or willingness to accept a change of some sort. Choice Modeling is a commonly used tool. Refer to Table 2 for further information on each of these valuation approaches.

A more philosophical debate exists around whether the pricing of non-traded goods and services— such as spiritual values or even some ecosystem services such as beautiful views or the bequeathement value of national parks— should ever be monetised.  One line of argument is that this diminishes their intrinsic value and makes these Earth system and iconic features subject to a debate about trade-offs. It is also the case that using the ‘trump card’ argument based on intrinsic values is not a cost free decision, and some judgement is required on the acceptability of this social cost.  For example, is it more important to conserve the intrinsically valued asset and give up a development option, or to protect the intrinsic landscape from sea-level rise? In contested contexts such trade-offs are often inevitable (despite deliberation efforts) especially if one or more interest groups seek to play the ‘trump card’ tactic.

Sequencing and iteration in decision-making

Depending on the nature of particular decisions, there is likely to be high value in sequencing of tools and even using them iteratively through a decision lifetime as knowledge changes and values evolve. This is well illustrated through the Values-Rules-Knowledge prism (Figure 2) described above. For example, engaging stakeholders in a meaningful way and representing their views and values in the development of future scenarios (see description in Table 3) can help you to consider ‘acceptable’ adaptation options that would then undergo a more detailed assessment. For example, deliberative tools such as Multi-Criteria Assessment (see Table 3) may be used to establish preferences between options in advance of a more detailed valuation study.

Decision support tools can also be used to establish (environmental, economic or social) thresholds and future trigger points (e.g. loss of a certain percentage of beach and dune, dam water levels) under which future options need to be more fully examined (e.g. narrowing of options, change of course) or implemented (e.g. Haasnoot et al. 2013 who discuss the concept of adaptation pathways in detail; Wise et al. 2014; Pathways approach).

Application

Figure 3 and Table 1 below provide an easy to use decision tree that helps you step through a series of questions to define the most appropriate valuation study to support an adaptation assessment, and recommends a particular tool or approach. The tools and approaches are then described in more detail in Table 3. A number of points are worth noting.

• Decision-making for adaptation investment is differentiated from more traditional approaches by the uncertainty attached to future impacts and benefits. This has prompted various principles-based investment frameworks along the lines of ‘no regrets’, ‘low regrets’ and ‘win-win’ to guide investment. In many cases these will lend themselves to an iterative approach whereby some decisions can be made with limited information / low granularity, whereas other decisions are best postponed or made flexible until more information about risks and impacts is available.
• As with more traditional approaches, the use of multiple tools can greatly benefit the decision-making process e.g. to monetise non-market costs and benefits, or to capture and prioritise options. A number of commonly used prioritising / sorting tools are also described in Table 3.

Finally, it must be accepted that different approaches will serve different circumstances and this depends on the context and nature of the problem and possible options, the value of available data, whether timeframes are flexible, appetite for risk, and not least of all, the skill / skills available to the decision-maker.

Table 1: Identifying the best adaptation assessment method (refer to Table 3 for a description of the tools and approaches). Source: Adapted from: DEFRA 2013; Dittrich et al. 2016.

Table 2: Commonly used approaches to generate monetary values for non-traded goods and services. Additional sources: Anning 2012; Lazarow et al. 2013.

Table 3: Summary of commonly used prioritising / sorting and valuation approaches.