Accounting for the effects of employment, equity, and risk aversion in cost-benefit analysis: An application to an adaptation project

This paper sets out to explore to what extent integrating employment effects, equity, and risk aversion within cost-benefit analysis (CBA) affect the economic appraisal of a climate change adaptation project designed to protect against flood risk in a region of Bilbao (Basque Country, Spain). Four CBAs are conducted: (i) a standard CBA; (ii) a standard CBA considering equity; (iii) a standard CBA considering equity and employment; and (iv) a standard CBA considering equity, employment and risk aversion. All CBAs are conducted using a time frame of 2014- 2080 and considering a 100-year return period under a middle of the road emission scenario (RCP4.5). A sensitivity analysis is also undertaken. Results suggest that the economic efficiency of the adaptation investment is contingent on what types of considerations are included within CBA. Integrating elements of employment, equity and risk aversion can strengthen or weaken the case for action (leading to higher or lower net-present values) and (depending on the discount rate chosen) may even be the deciding factor for determining whether a particular action should be carried out or not (whether the net-present value is positive or negative). © The Author(s), 2021.

Acknowledgments: The funding for this work was provided by the European Commission 7th Framework Programme ECONADAPT project on the “Economics of climate change adaptation in Europe” under the grant agreement No. 603906. This research is also supported by the Basque Government through the BERC 2018-2021 program and by Spanish Ministry of Economy and Competitiveness MINECO through BC3 María de Maeztu excellence accreditation MDM-2017-0714.

BERC, MINECO, European Commission 7th Framework Programme