Cost-Benefit Analysis of climate change adaptation projects

Report 2017/28

Anne Maren Erlandsen, Haakon Vennemo og Sofie Skjeflo

Cost-Benefit Analysis of climate change adaptation projects

Category	Reports
Sub-Categories	Economic AnalysisClimate change and the green transformation
Year	2017
Report Number	28
Author(s)	Anne Maren Erlandsen Haakon Vennemo Sofie Skjeflo
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R	E	PORT	 	
2017/28

Cost	-Benefit Analysis of	 Climate
Change Adaptation Projects

Anne Maren Erlandsen, Haakon Vennemo, and Sofie Waage 	Skjeflo
VISTA ANALYSE AS

Cost	-Benefit Analysis of Climate Change Adaptation Projects

Document details
Vista Analyse	 AS	 	Re	port num	be	r 2017/28
Report title	 	Cost	-Benefit Analysis of Climate Change Adaptation
Projects
ISBN	 	978	-82	-8126	-343	-7
Authors	 	Anne Maren Erlandsen, Haakon Vennemo, and
Sofie Waage Skjeflo
Dat	e for 	completion	 	17.10.2017
Pro	ject leader	 	Haakon Vennemo
Commissioned by	 	EEA grants (Iceland, Liechtenstein, and Norway
grants)
Availability	 	Public
Published	 	www.vista	-analyse.no
Keywords	 	Cost	-Benefit Analysis, climate change adaptation,
rain	 garden

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Foreword
Vista Analyse has prepared a methodology document for Cost	-Benefit Analysis (CBA)
of climate change adaptation 	projects as an 	input to the	 bilateral	 project CLIMCITIES;
CLIM	ate change adaptation	 in small and medium size CITIES.
Vista Analyse is cooperating with 	the 	Institute of Environmental Protection 	- National
Research Institute	 (IOŚ	-PIB	), a governmental Institute in Warsaw, 	Poland	, on the
project. The project 	is financed under the Cooperation Fund of the Bilateral Financial
Mechanism of the European Economic Ar	ea for the years 2009	-2014	 and the 	Polish
state budget.
The main objective of the CLIMCITIES project is to develop a	daptability to climate
change in small and medium	-sized Polish cities by providing local knowledge on
adaptation t	o climate change	. As part of the project, 	five Polish cities have developed
adaptation strategies in cooperation with 	IOŚ	-PIB 	and scientific c	entres. This
methodology docume	nt is an input to the strategies. It 	provides guidance for	 how to
perform a Cost	-Benefit Analysis in the context of climate change adaptation, as wel	l as
how the methodology could	 be implemented in the case of one type of ada	ptation
measure; a rain garden.

Haakon Vennemo
Project 	manager
Vista Analyse AS

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Table of Contents
Foreword	 ................................	................................	................................	.....................	 1
Executive summary	................................	................................	................................	....	 5
1. 	What is a Cost	-Benefit Analysis?	 ................................	................................	.......	 7
2. 	When to perform a CBA?	 ................................	................................	....................	 8
3. 	How to perform a CBA?	 ................................	................................	......................	 9
3.1	 	Define problem and goals	 ................................	................................	...........	10
3.2	 	Establish the baseline scenario	 ................................	................................	...12
3.3	 	Specify alternatives	 ................................	................................	.....................	12
3.4	 	Map effects	 ................................	................................	................................	.13
3.5	 	Monetise effects	 ................................	................................	..........................	14
3.6	 	Describe non	-monetary effects	 ................................	................................	...18
3.7	 	Describe distributional effects	 ................................	................................	.....	19
3.8	 	Sensitivity analysis	 ................................	................................	......................	19
3.9	 	Overall assessment	 ................................	................................	....................	21
4. 	Guidance for 	CBA of 	a rain garden	 ................................	................................	...22
4.1	 	Problem and goals	 ................................	................................	......................	22
4.2	 	Baseline scenario	 ................................	................................	.......................	23
4.3	 	The alternative scenario; rain garden	 ................................	..........................	28
4.4	 	Costs	 ................................	................................	................................	..........	28
4.5	 	Benefits	 ................................	................................	................................	.......	29
4.6	 	Parameters for calculation of net present value	 ................................	..........	33
4.7	 	Concluding remarks	 ................................	................................	....................	33
References	 ................................	................................	................................	.................	34
Appendix A	: Methods for valuation of non	-market effects	 ................................	....	37

Tab	les	:
Table 3.1	 Stages of a Cost	-Benefit Analysis	 ................................	...............................	10
Table 3.2 Examples of elements for presentation of context in baseline scenario	 ......	11

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Table 3.3 Eur	opean Commission’s reference periods by sector	 ................................	. 18
Table 3.4 Stakeholder matrix	 ................................	................................	.....................	 19

Text boxes	:
Text box 4.1 Potential adverse effects from floods	 ................................	.....................	 25
Text box 4.2 Estimated avoided damage based on insurance premiums 	– example from
Oslo	 ................................	................................	................................	............................	 26

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Execut	ive summary
We explain the steps involved in a	 Cost	-Benefit	 Analysis	 (CBA)	, and 	show 	how 	CBA	 may
be applied to the analysis of a climate change adaptation project. 	CBA	 of adaptation
projects is becoming necessary as climate change draws closer and the need for
adaptation increases	, while funds are scarce	.
Adaptation to climate change is	 local
Adaptation to climate change will be necessary this century. Some areas will 	become
drier, 	mostly	 if they are dry already	. Other areas will become wetter, most	ly 	if they are
“wet” already	, i.e. precipitation is high. Sea levels will rise, 	storm	 patterns will differ from
what we 	are 	used to, 	and 	temperatures will 	increase	. Societies	 will need to adapt to this.
Adaptation to climate change is mostly local. It will affect each and every local community
and more often than not it is local communities that are best positioned to develop
adaptation measures.
During 2017	, the Institute of Environmental Protection in Warsaw 	and Vista Analyse have
trained executives from 	local communities in Poland in developing adaptation measures
to climate change.	 Some cities have developed strategies for adapta	tion. This
methodology docu	ment	 has been developed as an input to the strategies.
CBA	 is helpful for making priorities and assessments
Local communities have limited funds and it is important to spend fund	s wisely. We
present a method that is helpful for making priorities and asses	s which adaptation
projects give “value for money”.	 This is the CBA method	.
We explain the CBA method	 and sugge	st how it may be used
We	 explain 	the	 methodology	 to an interested reader with little knowledge of the topic	,
and illustrate how it may be applied to a climate change adaptation project, 	specifically
a rain	 garden. A rain	 garden i	s an important example of a blue	-green solution (a surface
level solution)	 for handling excess rainwater and threats of 	flooding	. Rain	 gardens are
becoming popular in many countries, but they can be made in differ	ent ways with
different 	cost	-benefit	 trade	-offs, and they do not suit every location equally well. Hence
the 	need for a CBA	 to assess whether money spent on rain	 gardens is wise	ly spent. We
do not have data to perform the actual analysis, but we suggest what data is needed and
what role it plays in the analysis. Besides preparing for priorities and assess	ments, CBA
is a way of focusing data collection efforts.
Nine 	stages	 in a b	enefit	-cost analysis
There are slight variations in how the stages of a benefit	-cost analysis are laid out, but
we find it useful to distinguish nine stages, see 	Table S	.1.

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Table S	.1 Stages of a Cost	-Benefit Analysis
Stage	 	Short description
1. Define problem and goals	 	Describe the problem that needs to be
addressed. This involves identifying the
character of the problem (it’s extent, who it
affects etc.) and the context in which the
problem exists. Based on the problem,
define one or more goals for the project and
criteria that must be met to achieve the
goal(s).
2. Establish baseline scenario	 	Establish a baseline scenario, which
represents a continuation of the current
situation without the project.
3. Specify alternatives	 	Specify one or more project alternatives that
addresses the problem in 1.
4. Map effects	 	For 	each 	alternative, map all potenti	al costs
and benefits.
5. Monetise effects	 	As far as possible, value a	ll market and non	-
market effects and calculate net present
value of each alternative.
6. Describe non	-monetised effects	 	Describe effects	 that cannot be valued
qualitatively.
7. Describe 	distributional effects	 	Describe distributional effects, for example
by developing a stakeholder matrix.
8. Sensitivity analysis	 	Perform a sensitivity analysis to illustrate the
sensitivity of results to changes in variables
in the analysis. This could either be done by
performing a partial sensitivity analysis, 	a
scenario analysis, 	or a Monte Carlo
sensitivity analysis.	 Perhaps the	 most
important factor for determining the
outcomes of climate adaptat	ion projects is
climate change.	 Sensitivity to climate change
scenarios should therefore ideally be tested
in this step.
9. Overall assessment	 	Finally, an overall assessment is made,
consi	dering the results of each alternative,
including impacts that have been valued and
those that have been described qualitatively,
as well as the uncertainties associated with
each alternative.

In the case of a rain	 garden the alternative may be an unres	tricted manifestation of
climate change, e.g., flooding, or it may be a conventional measure to reduce or eliminate
flooding (such as increased sew	era	ge capacity). We assume in this 	methodology
document	 that the alternative is climate change. If instead th	e alternative were increased
sew	erage capacity, sew	erage capacity could also be compared to climate change, which
would indirectly compare 	the 	two measures against each other.	 Several measures may
be integrated into the analysis in this way.

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1.	 What is a 	Cost	-Benefit	 Analysis?
Many public and private projects have a wide range of impacts and can af	fect several
different groups in	 society. The weighing of these consequences is complicated and
raises the need for methodology that can simp	lify the comparisons. A 	Cost	-Benefit
Analysis (	CBA	) is	 an answer to this need, and 	an analytical	 tool for prioritisin	g and
assessing various actions	 that can be taken to achieve a goal.
In a 	CBA	, comparisons are simplified by the fact that many	 of the con	sequences of a
project are expressed on a common scale; 	in monetary terms	. A CBA aims to provide a
comple	te assessment of the potential impacts of a project on the welfare on society. The
analysis	 includes both 	market 	im	pacts	, suc	h as investment and operat	ing	 costs, bu	t also
impacts 	for which there are no market prices, 	such as changes to	 water quality,
ecosystem function, and human health.
While the analysis attempts to value all costs and benefits of a project in monetary terms,
there may be instances where this cannot be done. 	Any impacts 	that cannot be valued
in monetary terms should be	 described qualitatively	 in the analysis	, and quantif	ied in
terms of physical impacts as far as possible (e.g. area of landscape affected, number of
instances of health problems)	. In a CBA, all relevant effects should	 be priced, quantified
and / or described verbally.
For some types of projects, it may be the case that it is difficult or undesirable to 	place
specific economic values on important outcomes (e.g. disasters involving large	-scale
loss of life). An approach can then be used that identifies the least	-cost solu	tion that
achieves a	 given	 goal, for example	 keeps probable losses to an acceptab	le level. This
is called a cost	-effectiveness analysis and is a variation of a CBA.	 Cost	-effectiveness
analysis 	is discussed further in section 	3.5.3	.
A CBA involves comparing a 	baseline scenario	, which represents a	 continuation of the
situation 	without	 the implementation of a project, with one or more project alternatives.
The “best” al	ternative is the one that maximizes the expected value of the project to
society.
The usef	ulness of a 	CBA	 rests on the assumption that	 the values used in the analysis
provide a reasonable expression of the society's appreciation of the different types of
consequences. 	The sum of individuals	’ willingness to pay is often used 	as the expression
of society's valuation	 of the project	.
CBA	s can vary from comprehensive and complex studies to brief and simple analyses.
The required scope and detail of the 	CBA	 will depend on the specific project under
consideration. 	CBA	 is most commonly carried out 	to assess a project 	befor	e 	it is
implemented	. The 	CBA	 can however also be performed to evaluate the performance of
a project after it has been implemented.
While 	CBA	 is a valuable tool 	for	 assess	ing	 the net effects of 	a p	roject, it is not intended
as	 the only basis for decision	-making.	 Decisions should be based on an 	overall
assessment of the conclusions of the 	CBA	 against additional inform	ation	, for instance
concerni	ng the distributional impacts of a project,	 and political 	considerations	.

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2.	 When to perform a CBA?
A CBA can be performed in a variety of situations. It may be for a project, policy change,
regulatory change, programme, reform, or plan. It may be applied to	 small or large
projects, new projects, rehabilitations, or upgrades. In the remainder of the text we refer
to these as ‘projects’.
The starting point for any project is a problem or a need to change the current situation.
In the context of climate change	 adaptation, the problem would stem from climate
change, either from changes that are already occurring or expected future changes. For
example, a city may be experiencing floods due to more frequent and intense rainstorms
and seek to implement measures to	 reduce the risk and severity of floods.
The	 entity responsible for	 address	ing	 the problem may have an idea of	 various measures
that co	uld achieve the desired outcome, but lack sufficient information 	on the
consequences of the measures 	to make a well	-found	ed de	cision	. This is when it is useful
to perform a CBA.
Some countries have	 formal	 guidelines for when to perform a CBA, for example
determined by the size	 of the investment, or the significance of the expected effects of a
project.	 For instance, i	n Polan	d, 	a CBA should be undertaken for 	major investment
projects (over 50 million euros) included in operational programmes (OPs) of the
European Regional Development Fund (ERDF) and the Cohesion Fund within the
Europe 2020 strategy.	1 However, it is also benefi	cial to perform CBAs for smaller
projects.

1 See European Commission (2014) for specific guidelines for these kinds of investment projects.

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3.	 How to perform a 	CBA	?
As previously 	mentioned, t	he starting point for a 	CBA	 is a problem that needs a solution.
It is important to understand the problem clearly. The CBA considers different 	alternative
courses o	f action	 that may solve the problem.
Before beginning a CBA, it should be ensured that the necessary resources in terms of
staff and possibly consultancy are available. If the objective of the analysis does not
match the resources available for the study, it would be better to reconsider the study.
Perhaps the objective needs to be constrained to studying just a few alternati	ve	s; or to
undertake a screening of the most important impacts; or perhaps it is possible to obtain
informative results without valuation. It is recommended to be explicit about any
constraints in the analysis, especially if elements relevant for the analy	sis have been
omitted.
An initial literature review of studies within the subject area is a way of collecting
information that might provide inspiration and avoid duplication of work. Involvement of
stakeholders in the process is also a way of collecting a	nd making use of available
information. In some cases	, the information and data necessary for the analysis are only
available from private companies or local authorities. Establishing a steering committee
is a particular form of involvement that enables st	akeholders to obtain insight in the
methodology applied and assumptions made. This may help the result of the CBA to be
accepted more easily.
Identifying the target audience, e.g. policy	-makers, public administration, industry
representatives and NGOs, ca	n help	 define the problem to be analys	ed. Policymakers,
be it local, provincial or national, may have different needs for information and decision
support, depending on the scale of the project and the complexity of the problem.
It may also be desirable t	o describe the roles and responsibilities of the public authorities
involved and affected by the project. This would indicate which authorities should be
involved or at least consulted during the process. In addition, it might indicate where
additional inf	ormation could be gathered	 from	.
The course of	 a CBA can be divided into nine	 main 	stages	, as illustrated in table 	3.1	.
How detailed the individual stages	 are, may vary from analysis to analysis.	 The stages
are described in	 further detail	 sections 	3.1	 to 	3.9	. It is important to clearly describe all
assumptions made throughout each stage of the analysis to ensure the analysis is
transparent and verifiable.
For the context of undertaking economic a	ppraisals of investment projects under the
Cohesion Policy 2014	-2016, relevant guidelines include:
• 	European Commission (2014). Guide to Cost	-Benefit Analysis of	 Investment
Projects 	– Economic appraisal tool for Cohesion 	Policy 2014	-2020.
• 	Minister Rozwoju i Finansów (2017). 	Guidelines for issues related to project
preparation 	investment projects,	 including income generating projects and
hybrids for 2014	-2020	.

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Table 	3.1 Stages of a Cost	-Benefit Analysis
Stage	 	Short 	description
1. Define problem and goals	 	Describe the problem that needs to be
addressed. This involves identifying the
character of the problem (it’s extent, who it
affects etc.) and the context in which the
problem exists. Based on the problem,
define one o	r more goals for the project and
criteria that must be met to achieve the
goal(s).
2. Establish baseline scenario	 	Establish a baseline scenario, which
represents a continuation of the current
situation without the project.
3. Specify alternatives	 	Specify one 	or more project alternatives that
addresses the problem in 1.
4. Map effects	 	For 	each 	alternative, map all potential costs
and benefits.
5. Monetise effects	 	As far as possible, value a	ll market and non	-
market effects and calculate net present
value of each alt	ernative.
6. Describe non	-monetised effects	 	Describe effects	 that cannot be valued
qualitatively.
7. Describe distributional effects	 	Describe distributional effects, for example
by developing a stakeholder matrix.
8. Sensitivity analysis	 	Perform a sensitivity analysis to illustrate the
sensitivity of results to changes in variables
in the analysis. This could either be done by
performing a partial sensitivity analysis, 	a
scenario analysis, 	or a Monte Carlo
sensitivity analysis.	 Perhaps the	 most
important factor for determining the
outcomes of climate adaptat	ion projects is
climate change.	 Sensitivity to climate change
scenarios should	 therefore ideally	 be tested
in this step.
9. Overall assessment	 	Finally, an overall assessment is made,
consi	dering the results of each alternative,
including impacts that have been valued and
those that have been described qualitatively,
as well as the uncertainties associated with
each alternative.
3.1	 Define	 problem	 and goals
The first 	stage	 of a 	CBA	 is to 	define the problem	. This can be done by answering the
following questions:
• 	What is the problem?
• 	What groups	/people are affected by the problem?
• 	What is the extent of the problem?

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• 	How serious is the problem?
• 	What factors may impact the problem over time?
• 	W	hy does the problem need to be solved now?
In this phase, i	t can be useful to talk to people who have expertise in the relevant
sector/industry	 or particular knowledge of the problem	. It is also important to identify
reasons for why the 	problem exists.
It is also	 useful to describe the socio	-economic/demographic, political and institutional
context in which the problem exists. Examples of the type of elements that could help
define the problem are given in table 	3.2.
Table 	3.2 Examples of elements for presentation of context in baseline scenario
Element	 	Examples
Socio	-economic/demographic	 	Data on 	the population living in the involved area
Description of the existing economic activities and
services
Political, institutional, and
regulatory factors
Reference to EU directives and sector policy documents
Reference to the priority axis and the intervention areas of
an Operational Programme (OP) 	(only applicable to
projects funded under an OP)
National/regional strategies on adaptation to climate
change
National civil protection / risk management strategies or
plans
Reference to flood risk management plans
Environmental framework	 	Quality and environmental status of the affected area
Protected a	reas
Areas subject to high hydro	-geological risks or other
environmental risks
Technical	 	Location and extension of the involved area
Morphological, geographical and geological features
Weather and climate conditions
Existence of sites of natural or cultur	al interest
Pollution and contamination in soil, groundwater,
sediment and surface water bodies
Source: Adaptation of Table 4.9 in European Commission (2014), page. 171.
Based on the problem, one or more goal(s)	, and criteria that must be met to achieve the
goal(s)	, should be defined for the project. The purpose of this first stage is to provide a
solid foundation for the analysis.
Examples of goals that may be relevant in a context of climate adaptation are (Euro	pean
Commission, 2014, p. 171	-172):
• 	Protecting human health
• 	Protecting buildings and other assets
• 	‘Climate proofing’ the built environment and existing infrastructure
• 	Decreasing pressure on natural resources
• 	Protecting coastal zones, forests, and natural p	arks from deterioration
• 	Increasing the ecosystem’s resilience

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3.2	 Establish the baseline scenario
The next 	stage 	is to establish a scenario which 	describe	s the current situation and the
expected future developments 	if no action is taken to solve the probl	em. 	This is called
the ‘baseline scenario	’ and represents a ‘do	-nothing’ alternative; it is a continuation of
the situation 	without	 the implementation of a project. 	The definition of the problem, as
described in section 	3.1	, provides a basis for the baseline scenario. 	Expected future
developments in society, such as economic growth, population growth, policy chan	ges
etc. 	should 	also be taken into account in the baseline scenario. 	It is crucial for the
analysis that th	e specification of the baseline scenario	 is as realistic as possible. A
specification of the base	line scenario	 that is overly pessimistic or optimistic can lead to
an over	- or underestimation of the net effects of the project.
Sometimes the current state is used as a baseline scenario. While the current state in
some cases represent	s the future reasonably well, this is not given. Usually the baseline
scenario will in	 fact evolve from the current state. 	It is sometimes said that an evolving,
dynamic baseline depend	s on more assumptions 	than a continuation of the current state	,
but	 to assume zero change in important drivers of a baseline scenario is just a	nother
assumpt	ion. It 	is not any more speculative to assume that the baseline scenario 	dynamic
than it is to assume that it is completely static.
When it comes to establishing a baseline scenario, CBAs of adaptation projects differ
from CBAs of most other projects. T	he most important benefit of investing in adaptation
to climate change is the expected avoided damage from future climate change. The
expected avoided damage	 is calculated as the difference between the expected damage
caused by climate change	 with and with	out adaptation, i	.e. the difference between the
baseline damage and the (residual) damage under adaptation. 	However, since future
climate change is uncertain, the benefits o	f investing in adaptation are also uncertain.
The se	nsitivity analysis of a 	CBA can	 be used to illustrate the sensitivity of results to
different climate change scenarios, see section 	3.8.2	.
Note that a 	climate 	change scenario	 usually	 is based on assumption	s about population
growth, economic growth and mitigation policies, and therefore includes important
assumptions about	 a baseline trajectory	, which should be made clear in the description
of the baseline scenario.
The assessment of adap	tation projects usually requires high resolution climate
projections for the climate phenomenon the adaptation project is expected to address.
For instance, if options for mitigating flooding are being assessed through a CBA, the
climate 	change 	projection	 should include information about the probability of flooding
due to excessive rainfall or sea level rise. It should also be possible to map expected
damages resulting from flooding to the climate change	 projection	. This	 is further
discussed in section 	3.4	.
3.3	 Specify alternatives
This 	stage	 involves identifying relevant projects that may solve the problem in terms of
size, t	iming, project design and cost. 	The	 definition of the problem and project goals, as
well as the baseline scenario, provide	 the	 basis for the identification of	 relevant
alternatives	. One alternative may result in net benefits compared to the baseline
scenario, however there may also be other	 alternatives that generate higher net benefits.
It is therefore important that there is a thorough process for consideration and selection
of alternatives.

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The alternatives should be specified based on realistic	 and well	-founded assumptions.
The descript	ion of each	 alternative s	hould 	start with a general description of 	how it can
achieve the	 project goal(s). 	The description must also include any dependencies and /
or impacts from other approved and planned projects.
Sometimes	, a 	screening of options and n	arrowing down to only a few alternatives (or just
one alternative) is done before the 	CBA	. For projects where this has not been done
be	fore the 	CBA	, a description of	 the breadth of available alternatives	, a narrowing down
of alternatives,	 and a brief explanatio	n of why some have been excluded	 should also be
given.
The description of the alternatives 	should be based on the baseline scenario	, and 	any
assumpt	ions about external factors	 (e.g. 	regarding climate change	 or policy
developments) sh	ou	ld be the same for the baseline scenario	 and the alternatives, unless
the alternatives are expected to influence any of these factors.
For each alternative, describe:
• 	The actions to	 be taken
• 	Where 	the project	 will be implemented
• 	The target group(s) of t	he project and other stakeholders (anyone significantly
affected by the costs or benefits of the project)
• 	The entity responsible for implementing the project
• 	Timing for implementation and decision	-making processes	, including	 possibilities
for flexibility 	in the implementation (e.g. a staged implementation)
• 	How 	the project 	will	 be financed
• 	Potential barriers	 (e.g. 	laws or regulations	)
• 	Other relevant activities to facilitate the implementation of the measure	.
In addition to assessing different alternatives, different solutions for the timing of
implementation and the consequences of deferring investment decisions should be
considered. 	The timing of the 	implementation will affect the net 	effects of the project, 	and
finding the best possible timing can be important in order to optimise the positive effects
of the project.
3.4	 M	ap effects
The next 	stage	 of the analysis is to identify the effects of the a	lternatives. Both market
and non	-market	 effects must be included. 	For	 costs and benefits, the expected value
must be given, as well as a description of the uncertainty of the estimates.	 As mentioned
above, the most important benefit of adaptation project	s is the avoided damage of events
caused by climate change. Undertaking a CBA of adaptation projects therefore requires
estimates of expected damage, as well as information about the extent to which the
project alternative(s) are expected to prevent the dam	age. The 	estimates of 	damage can
for instance be based on data from previous events, such as flooding or heat waves,
which again can be used to calculate expected annual damages (see for instance Olsen
et al., 2015 for an example related to urban flood ris	k). The calculation of expected
damages is complex, and in most cases the analyst will retrieve information about
expected damages from experts.

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In addition to creating an economy that is more resilient to the effects of climate change,
adaptation strategi	es/measures often have ancillary effects that can either be positive
(co	-benefits) or negative (co	-costs). For example, the implementation of blue	-green
measures to adapt to heavier and more frequent rain storms in the future, can also have
additional bene	fits such as 	cleaning	 the air, supporting wildlife, and creating attractive
recreational areas (Chambwera et al. 2014). All relevant and significant ancillary effects
should be considered and included into the CBA.
Some projects may cause ripple effects	. That is, t	he p	roject may cause one effect, which
again leads to other effects and so on	. In CBAs 	only the first effect	 should be included,
to ensure effects are not double counted	 (Norwegian Government Agency for Financial
Management	 2014)	.
3.5	 Monetise effect	s
A CBA 	is carried out to assess various solutions to a problem and their 	contribution to
welfare. In order to do so, the analysis aims to monetise the costs and benefits of
different project alternatives. 	In a financial analysis, 	costs and benefits are va	lued using
market prices only. In a CBA, however, costs and benefits are	 measured by 	shadow
prices	. The key principles for the use of shadow prices is that benefits should be valued
by people’s collective 	willingness to pay	 to achieve the benefits, while costs should equal
the value of the resources 	used in the project in their best alternative use (the 	opportunity
cost	 of the resources).
Put more simply: Benefits are valued based on what people collectively are assumed to
be willing to pay for these benefits, and costs are valued based on what people
collectively are willing to pay to avoid th	ese costs. 	In this context, ‘people’	 is everyone
affected by a project, or in other words; everyone that would place a value on the ef	fects
of the project.
Shadow prices are often equal to the prices observed in the market, but under certain
circumstances, they may differ.	 Examples of factors that result in differences between
shadow prices and market prices include environmental effect	s, taxes, and imperfect
competition.
A CBA	 involves the valuation of 	all	 effects of a project. However, not all effects can easily
be valued, especially those that arise from changes to goods and services not traded in
a market. This is often the case for	 the benefits of a project. Valuation of market and non	-
market effects is covered in sections 	3.5.1	 and 	3.5.2	, respectively. 	Section 	3.5.3
describes cost	-effectiveness analysis, which is a version of CBA suited 	for	 situations
where it is challenging to estimate benefits, and s	ection 	3.5.4	 describes 	the concept of
net 	present value calculation	.
3.5.1	 Market 	effects
The key market e	ffects of an adaptation project are likely to include the costs of
implementing, operating, and maintaining the project. The resources necessary to
implement, operate and maintain the project may have a market price that equals the
shadow price, but there 	may also be some	 distortions in the market for which the shadow
price should be adjusted.
For example, imagine that a city is considering to re	-enforce a dike to increase its stability
and provide more safety against flooding. The wages of the labour force	 used to re	-
enforce the dike should be included in the 	CBA as 	project	 costs	. The wages included
should however be the shadow wages, which may differ from the act	ual wage paid by

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the company	. If the State gives subsidies to employment in this area, the wage	 paid by
the company may be lower than the social opportunity cost of the labour.
Whether the shadow price differs from the market price must be assessed on a case	-by	-
case basis. There 	are	 several approaches to calculate the shadow price, and each of
them	 could be more or less suitable for certain typologies of goods and services	. The
European Commission has published a guide to cost	-benefit analysis of investment
projects (see European Commission 2014), and 	presents some general rules for the
conversion 	of market prices to shadow prices.
The guide distinguishes between whether goods a	re inputs or outputs of the project.
Outputs are	 primarily 	valued using the willingness	-to-pay approach, which is described
in section 	3.5.2	. See also Annex VI of European Commission (2014) for a detailed
description of the approach. 	As far as inputs	 are 	concerned, they can be regarded as
tradable or not in international markets. The ge	neral ru	le for internationally tradable
goods, such as most manufactured commodities, is to use their border price.
For	 non	-tradable goods,	 a different approach is followed, depending on 	whether they are
minor items o	r major items. For minor items, 	a 	special parameter called standard
conversion factor (SCF) can be used.	 For major items, the shadow price can	 often	 be
calculated based on the long	-run marginal cost. 	For labour, a specific shadow price (the
shadow wage), which accounts for local distortion	s in the labour market, should be
calculated. 	More detailed descriptions of the	se	 approaches and when they should be
applied are given in Annex III in European Commission (2014).
It should be noted that a	ccountin	g for the difference between shadow prices	 and market
prices usually matters less for the outcome than a	ccounting for non	-market effects	.
Therefore, if there is little time and unless the analyst has advanced competence, market
price	s could be used to indicate shadow prices, unless there are obvious	 reasons for
doing otherwise.
3.5.2	 Non	-market 	effects
No cost	-benefit analysis is complete without a con	sideration of non	-market effects	. Non	-
market goods and services	 are goods and services for which a market value is not
available.	 In principle, the value of 	a non	-market good or service can be captured by
people’s collective	 willingness to pay for the good or service	. Examples of (positive) non	-
market effects are prevention of injuries or accidents, improvement of landscape, noise
reduction, increased resilien	ce to current and future climate change, etc.	 The va	luation
of non	-market effects	 is often fraught with methodological and practical difficulties, 	but 	it
is usually better to include an uncertain 	estimat	e than to leave it out of the CBA
altogether.
In the	 context of climate change adaptation, 	the benefits of a project	 are non	-market
benefits	, and shoul	d be valued based on people’s collective	 willingness to pay to achieve
the	se	 benefits. 	The key benefit from adaptation projects is the 	avoided 	damage	, i.e.
damage	 that otherwise would have occurred if the project had not been implemented
(e.g. damage to properties and infrastructure, 	negative health impacts, loss of
biodiversity	 etc.)	. This is of course challenging to estimate because it is not possible to
predict 	exactly 	when an actual disaster will occur and with what intensity. 	The estimates
will have to be based on probabilities of extreme weather events occurring (e.g. heat
waves, storm surges, rainstorms, drought etc.).
Some examples of benefits from	 avoided damage, as well as other ancillary benefits
from adaptation projects,	 are discussed below. 	These examples are based on pages

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174	-176 in European Commission (2014). 	Note that 	the below	-mentioned benefits do
not represent 	an e	xhaustive list. There m	ay be other benefits that arise from the
implementation of climate change adaptation measures and the full list of benefits should
be assessed on a case	-by	-case basis.
A short description of the	 key approaches to measure willingness to pay	 in monetary
ter	ms	 for non	-market effects	 is given in 	Appendix A	.
Improved health conditions
Projects aimed at preventing the risk of natural disasters	 can lead to improved health
conditions. 	For 	example,	 a measure implemented to reduce the risk of flooding could
reduce t	he 	risk of 	diseases spreading from polluted water, or in the case of severe floods
prevent the loss of life. Additionally, green infrastructure 	– such as green roofs or rain
gardens 	- could contribute to cleaner air and associated improved health benefits.
Approaches	 that can be used to value the changes in health outcomes include 	stated
preference approaches (surveys) or revealed preference methods 	(hedonic wage
method).	 If it is not possible in practice to measure the willingness to pay for improved
health outcomes 	using the methods mentioned above, the human capital approach	2 or
the cost of illness approach	3 may be applied.
Increased recreational value
This benefit could arise from the recovery or preservation of sites with recreational value
(e.g. beaches, natural 	parks and protected areas) where recreational activities such as
trekking, picnicking, and bathing can be carried out. Some adaptation projects may also
create new recreational areas	 in urban centres	, for	 example by opening up streams	 in
cities	 for flood p	revention	. Increased recreational val	ue may be estimated using revealed
preference methods, such as the travel cost method	4 or hed	onic pricing method	5, or
stated	 preference methods. 	Alternatively, the 	value	 transfer	 (or ‘benefit transfer’)
approach	 can be 	used.
Ecosystem and biodiversity preservation
This benefit relates to 	the value people place on the existence of ecosystems and
biodiversity in	 good conditions	. Methods that can be used to value ecosystem a	nd
biodiversity preservation include	 contingent	 valuation and	 value	 transfer.
Reduction of damages to properties
Damages to properties is a common consequence of natural disasters and extreme
weather events. 	The benefit of preventing damages 	to capital (infrastructures, buildings
and machinerie	s) and 	natural (forests, biodiversity) stocks	 could be measured based on
expected avoided damage	. The information and data needed to 	estimate the expected

2 The basic idea of the human capital approach is that an individual is ‘worth’ to the society what
he/she would have produced in the remainder of their lifetime. See page 96 of European
Commission (2014) for a more detailed description.
3 The cost of illne	ss approach combines direct and indirect costs into an overall societal estimate.
Direct costs include the medical costs necessary for treating a particular disease. Indirect costs
measure the value of lost production because of reduced working time due to	 illness. See page
130 of European Commission (2014) for a more detailed description.
4 This is naturally most relevant for recreational sites people travel to, such as beaches and
natural parks.
5 This method is most relevant for recreational site	s in ur	ban areas	, where the value of the
recreational site cou	ld be reflected in 	property value	s.

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avoided damage 	should come from properly developed flood risk and hazard maps, in
combination with flood mode	lling.
Alternatively, one may estimate avoided damages based on market insurance
premiums	, as a proxy to the value of avoided property damages	. For those assets where
market insurance does not exist, averaged calculations for avoided costs for public
admin	istrations for civil protection activities, compensation paid to citizens, relocations
of buildings etc. should be added to the analysis.
3.5.3	 Cost	-effectiveness analysis
For some types of projects, it can be relatively straightforward 	to estimate the costs of
the project, while it is almost impossible or very challenging to value the benefits. There
may also be instances where the valuation of effects raises difficult ethical questions (for
example in the valuation of health benefits). In such situations, 	cost	-effectiveness
analysis 	is an alternative to CBA. The aim of the analysis is to find the least	-cost solution
to achieve a given goal. That is, the analysis compares the relative costs of different
alternatives, while the benefits are the same for all alternatives.
An example of	 a situation where a cost	-effectiveness	 analysis	 could be suited is where
a project must be implemented to satisfy legal requirements. The legal requirements
would then be given, and one could compare the costs of various solutions that would
satisfy the r	equirements.
It should be noted that if one or more of the alternatives result in benefits 	additional	 to
the given goal, these benefits must be included in the analysis. Take for example an
analysis where the goal is to increase the resilience to flooding	 in an area by a certain
amount. Different solutions to this problem may include expanding the existing sewage
system, channelling water to nearby ponds or retention basins, or implementing rain
gardens or green roofs. In addition to retention of water, th	e implementation of green
infrastructure could lead to other benefits such as 	noise reduction	, CO	2-capturing etc. In
such instances, the benefits could either be included as negative costs (i.e. reduce the
total costs of the option) or as a qualitative des	cription.
3.5.4	 Calculation of 	net 	present value
Once the 	costs and benefits of the differe	nt alternatives have been estimated	, the	 net
present value	 of each alternative	 can be calculated	. The calculation of present value is
a method to calculate the value in monetary terms of costs and benefits that occur at
different points in time. The 	net	 present value is the present value of project benefits less
the present value of project costs. In o	rder to calculate the net present value, one needs
annual estimates of 	expected 	costs and benefits, a 	social discount rate, and a project
period. The estimation of costs and benefits ha	s already been covered in this chapter.
The social discount rate and pr	oject period are discussed below.
Social discount rate
In the calculation of net present value	, future effects are discounted by a positive social
discount rate, such that future effects are assigned a lower value than effects occurring
today, all else being equal. 	Because the costs and benefits of adaptation to clima	te
change occur 	at different po	ints in time	, the s	ocial 	discount 	rate is a key factor in 	CBA	s
of adaptation measures. 	The size of the discount rate can significantly impact the
calculated value of long term projects. The higher the discount rate, 	all else being equal	,
the lower the cont	ribut	ion of future benefits and costs to the overall value of the project.

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The European Commission (2014)	 recommends that 	a social discount rate	 of 5 per cent
is used 	for major projects in Cohesion countries and 3 	per cent	 is used	 for 	the other
member stat	es	. As Poland is a Cohesion country a social discount rate of 5 	per cent
should be applied.
Project period
The estimated costs and benefits of a project should cover a period appropriate to the
project’s economically useful life and its likely long	-term 	effects (European Commission,
2014). The reference periods proposed by the European Commission for different
sectors are presented in 	table 	3.3	. These values should be considered as including the
implementation period.
Table 	3.3 European Commission’s reference periods by sector
Sector	 	Reference period (years)
Railways	 	30
Roads	 	25	-30
Ports and airports	 	25
Urban transport	 	25	-30
Water supply/sanitation	 	30
Waste management	 	25	-30
Energy	 	15	-25
Broadband	 	15	-20
Research and Innovation	 	15	-25
Business infrastructure	 	10	-15
Other sectors	 	10	-15
Source: Table 2.1 in European Commission (2014), page 42.
If the NPV of an alternative is positive, the alternative will increase 	social welfare	. If more
than one alternative has a positive NPV, the one with the highest NPV will most likely
yield the highest welfare gains. However, costs and benefits that have been described
qualitatively must also be considered in the overall assessment. This is 	described in
more detail in section 	3.9	.
3.6	 Describe non	-monetary effects
In most projects that result in	 environmental 	effects	 there will be some 	effects	 that are
impossible, or impractical to value. 	Whenever money quantification is not possible,
effects should at least be identified in physical ter	ms for a qualitative assessment	.
Questions that can be asked to	 analyse the significance and extent of the effects include	:
• 	What is the size of the area affected?
• 	How many people are affected?
• 	How significant are the effects on people? (low, medium, high significance?)
• 	How long will the effect last, and how often does	 it occur?

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3.7	 Describe distributional effects
A 	CBA should include an analysis	 of t	he distribution o	f the project costs and benefits
across different groups of stakeholders	.
The 	first step	 of the distributional analysis 	is to identify stakeholders that will b	e affected
in a noticeable way by the implementation of the project. 	Examples of groups of
stakeholders are residents in the relevant area, government, users and suppliers. Then,
to summarise all the effects that are encountered by the project, a 	matrix 	ca	n be
developed	 linking 	each effect with	 the stake	holders affected by the impact. 	This 	is called
a stakeholder matrix. 	Table 3.4 	illustrates a possible set	-up	 of a stakeholder matrix.
Tab	le 3.4 Stakeholder matrix
Stakeholders	 	Stakeholder
group 1
Stakeholder
group 2
Stakeholder
group 3
…
Effects (monetary & non	-
monetary)

Effect 1
Effect 2
Effect 3
…
Source: 	Adapted from 	European Commission (2014), page 65	.
3.8	 Sensitivity analysis
When a	 CBA is conducted there is often uncertainty about what the actual quantities and
prices will be. The purpose of a sensitivity analysis is to study how sensitive the result is
to changes in key assumptions.	 Sensitivity analysis 	enables the identification of the
‘critical’ variables of the project. Such variables are those whose	 variations, be they
positive or negative, have the largest impact on the project’s financial and/or economic
performance	 (European Commission 2014)	.
Three	 forms of sensitivity a	nalysis are presented here:
• 	Partial 	sensitivity 	analysis	: only one v	ariable is changed at the time
• 	Scenario analysis	: assessment of the consequences of simultaneous uncertainty
about several variables
• 	Monte Carlo analysis: 	in additi	on to assessing simultaneous uncertainty in
variables,	 this analysis	 takes	 into account correlations between these variables.
Since future climate change is uncertain, the benefits o	f investing in adaptation are also
uncertain. Different future climate ch	ange scenarios	, the possible range of outcomes that
can occur, and the probabilities of the various outcomes	 should therefore be considered
in the sensitivity analysis.
An often	-used approach in CBAs of climate change adaptation, is to look at avoided
damages under two or more climate scenarios to capture a wide range of climate change
projections, and thus a wide range of possible avoided damage (see for instance
Markandya et al. 2014).	 This will highlight the large uncertainty in projected climate
cha	nge, and projected impacts of climate change. The scenario analysis, described in

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section 	3.8.2	, is well suited to analyse the sensitivity of project outcomes to d	ifferent
climate change scenarios.
The scenario analysis is an extension of the partial sensitivity analysis. The guidelines
by the European Commission (2014) require that both a partial sensitivity analysis and
a scenario analysis be performed for major i	nvestment projects (over 50 million euro)
under the Cohesion strategy.
3.8.1	 Partial sensitivity analysis
A partial sensitivity analysis studies the change in the outcome (here net pre	sent value)
from 	changing one i	nput variable at a time. T	ypical key variables	 for the sensitivity
analysis are listed	 below	.
- 	discount rate
- 	time horizon of the project
- 	quantity of emissions/discharges to be treated or the environmental resource
considered in the analysis
- 	investment cost
- 	prices of electricity, fuel or other inputs
- 	monetised, key environmental impacts
The analysis is carried out by varying one variable at a time and determining the effect
of that change on the NPV. 	The outcome of the sensitivity analysis should be presented
together with the result of the CBA, so th	at it becomes visible for the decision	-maker
where the potential drawbacks of the project are. Also, the decision	-maker should be
made aware of any assumptions that are uncertain and have a high impact on the result.
According to t	he European Commission (2	014)	, variables for which a variation of ±1 %
of the value adopted in the base case gives rise to a variation of more than 1 % in the
value of the NPV	 should be considered ‘critical’	.
The sensitivity analysis may be supplemented by a ‘worst case’ and ‘best	 case’ that show
the outcome if several variables take on their worst or best possible values. If the result
varies significantly with a change in a key variable, it is important to define this var	iable
as precisely as possible.
Another component of the se	nsitivity analysis 	is the calculation of the 	switching values	.
This is the value that the analysed variable would have to take in order for the NPV of
the project to become zero, or more generally, for the outcome of the project to fall below
the minimum 	level of acceptability	 (European Commission 2014)	.
3.8.2	 Scenario	 analysis
A scenario analysis 	is an extension of the partial sensitivity analysis, whereby a number
of scenarios representing alternative future directions are created. 	Combinations of
‘optimistic	’ and ‘pessimistic’ values of the critical	 variables 	identified in the partial
sensitivity analysis 	could be useful to build 	different realistic scenarios	. As described
above, the scenario analysis can be used to analyse the sensitivity of the results of t	he
CBA to different climate change scenarios.

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3.8.3	 Monte Carlo sensitivity analysis
The first step in a Monte Carlo analysis is to specify a probability distribution for each of
the key variables. Then, the calculation of net benefits is repeated a large number	 of
times randomly in a computer programme. The result of the analysis is a set of probability
distributions showing how uncertainties in key variables may impact on key outcomes.
More resources are required to undertake a	 Monte Carlo analysis than partial	 sensitivity
analysis and scenario analysis.
For further reading on Monte Carlo analys	is, see Boardman et al. (2006) and pages 71	-
73 in European Commission (2014).
3.9	 Overall assessment
The final step of the CBA is to undertake an overall assessment of the 	results from each
of the previous stages of the analysis	. Factors to be considered include:
• 	The net present value of each alternative
• 	Non	-monetised effects
• 	Uncertainty
The goal of this stage is to inform the decision	-maker of the analysis in a transparent and
straightforward manner and to present 	well	-founded recommendations regarding
adaptation measures	.

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4.	 G	uidance for 	CBA of 	a 	rain garden
In 	chapter 	3, we	 set out nine steps for performing a CBA. In this chapter, we will provide
guidance for how you would go about to complete a CBA for the implementation of 	a rai	n
garden.	 This is not an actual application of a CBA, but a demonstration of the types of
issues to consider, data needed and 	how	 costs and benefits for the implementation of 	a
rain garden	 could be estimated	.
While we have used a rain garden as an 	example, several of the issues to consider and
ways to calculate costs and benefits are relevant for other climate change adaptation
measures as well.
4.1	 Problem and goals
Cities are especially prone to flooding because they are characterised by a large porti	on
of built	-up area. Apartment blocks, roads, walkways, parking lots and	 other structures
with 	impervious surfaces do not allow water to infil	trate into the ground, but send	 the
water	 across	 the surface	 instead	. This stormwater	 runoff (also called urban ru	noff or
surface water	 runoff) increases the risk of flooding. It also carries pollutants with it and
contaminates streams and lakes if left untreated before entering the water (Haughton
and	 Hunter 1994 i	n Bolund og Hunhammar 1999	).
Research has shown that 	around 55 	per cent	 of precipitati	on in cities ends up as
storm	water runoff due to the lack of vegetative cover and other permeable surfaces.	6 In
contrast, 	there is 	only about 10 	per cent	 runoff in areas with natural ground cover	. T	he
rest of the precipitat	ion is absorbed into the ground or evaporates via the vegetation
(FISRWG 1998).
Me	asures 	to reduce the risk of flooding	 in cities 	can generally be categorised into
conventional measures, which channel water in pipes below ground, and blue	-green
measures	7, which are natural solutions ba	sed on water and/or vegetation	 and	 designed
to absorb the rainwater locally. 	Blue	-green measures can reduce the pressure on the
drainage sys	tem in cities by infiltrating 	or retaining water during the peak of rainstorms.
Rain g	ardens 	(also referred to as bioretention) a	re one of several blue	-green measures.
Other measures include green roofs, open streams, ponds and wetlands.
The suitability of the different meas	ures 	will depend	 on 	the 	local conditions	 of the area
in question	. Firstl	y, the measures vary in their capacity to infiltrate/retain runoff and so it
is necessary to analyse the extra capacity needed in the area to reduce the risk of future
floods. Secondly, the costs of implementing different measures vary with condition	s such
as the type of ground cover	 and terrain	, the value of the land	, and the characteristics of
the built environment in the area.
For this examp	le, we are going to assume that	 there has been a selection process prior
to this analysis, from which 	a rain	 garden 	is assessed to be the most suitable measure
for 	an	 area.	 A rain garden is a planted depression whereby water is stored on the surface
and later infiltrated into the ground or 	led 	into the drainage system. 	A rain garden is 	not
a permanent pool, but 	is 	flooded temporarily during rain.

6 Based on the assumption that there is 75 	– 100 	per cent	 impermeable ground cover.
7 Also referred to as ‘Sustainable Urban Drainage Systems	 (SUDS)	’ or ‘Green Infra	structure’.

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Rain gardens have the potential to control stormwater quantity and quality, as well as
restor	e groundwater supplies. In addition, rain gardens provide green environments
which can support biodiversity. Plants and vegeta	tion can also help improve air quality,
reduce noise, and capture CO	2. Rain gardens are typically small installations (for
example the size of a garden bed) and could be analysed as a solution for a small area,
or as part of a combination of solutions for 	a larger area.
A description of the floods that have occurred in the area in the past and the types of
problems these floods have caused will help identify the extent and seriousness of the
problem	 the rain garden 	is intended to solve	. Other 	useful 	information 	include	s
characteristics of the sewerage system (separate or combined), any water bodies the
surface water runoff would flow into, 	the 	degree of impervious	 surfaces, population	,
number of houses, activities in the area (e.g. industrial, commerc	ial), and the state of
natural resources and ecosystems in the area.	 The ideal	 tool to assess the likelihood of
flooding	 would be a hydr	aulic	 model describing inflow, accumulation	, and outflow in an
area.
It is also useful to describe the socio	-economic/d	emographic, political and institutional
context in which the problem exists	. This coul	d include whether there are any plans or
strategies (at local, regional or national level)	 for	;
• 	Land use changes 	in the area
• 	Expansions/upgrades/alterations t	o the curren	t sewerage system
• 	Stormwater	 management/	climate change adaptation
The description of the problem should also include a description of who it affects. In the
context of floods from stormwater runoff, this	 could include owners of the properties
damaged durin	g floods, insurance companies (payment of water damage
compensation), the fire brigade (if their services are called upon during a flood), people
affected by traffic delays or disruptions, and the city administration (repair of any damage
to infrastructure	 and other clean	-up efforts after the flood).
The project goal	 and associated criteria should be based on the defined problem. I	n the
context of floods	, the goal 	could for example be to 	protect buildings, existing
infrastructure, and other assets from 	water damage	. To achieve this goal, it would be
necessary to reduce the velocity and volume of surface water runoff.
If contamination from surface water runoff is 	also 	a problem in the relevant area, an
additional goal could be to 	reduce contamination of w	ater running into nearby water
bodies	. To achieve this goal, it would be necessary to remove pollutants from the runoff
before it enters streams or other recipients.
4.2	 B	aseline scenario
The next step is to establish a scenario 	that	 describe	s the current situ	ation and the
expected future developments if no action is taken to solve the probl	em. This is called
the ‘baseline scenario	’ and represents a ‘do	-nothing’ alternative; it is a continuation of
the situation 	without	 the implementation of a project.
4.2.1	 Damage 	from floods
For the baseline scenario, we need to establish the likely annual flood damages in the
future. This	 can be measured based on a combination of the 	flood hazard, 	i.e. the
likelihood of a flood occurring and its characteristics, and the 	vulnerabil	ity	 of the area
(Olsen et al.	 2015	).

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Flood hazard
There are several factors 	that 	determine the likelihood of a flood occurring and the extent
of the flood. In this example, we are concerned with pluvial floods 	(also called storm	water
floods)	, which	 arise from storm	water accumulating from heavy rainfall	. The key
contributor to pluvial flo	oding is precipitation. Storm	water runoff generally collects when
there is intense rain over a short period of time (often lasting from a few minutes to a few
hours 	(DSB 2016)). From now on, we will use the term ‘flood’ synonymous with ‘pluvial
flood’	.
The capacity of the sewerage system (both the speed at which it can transport water and
the volume it can handle) also impacts the likelihood of a flood occurring. With	 the
sewerage system overwhelmed, water 	can 	flow out into streets and nearby structures	 or
force waste water back into houses through drain pipes	.
Other factors 	that 	impact the amount of runoff include the terrain and ground cover. A
high concentration of 	impervious surfaces lead	s to a higher level of runoff compared to
natural ground cover because it allows less evapotranspiration and infiltration into the
ground. T	he time of the year and 	antecedent conditions such as amount of 	rain in th	e
days preceding t	he rainstorm could also impact the amount of runoff.
The flood hazard can be mapped using hydraulic models based on historic data. Input
data for such models would include information 	on 	the factors that determine the
likelihood of floods occurring (i.e. i	nformation about rainfall, sewer system hydrau	lics,
terrain/elevation etc.	).
Due to climate change, the intensity and frequency of rainstorms is expected to increase
in the future, which in turn will increase the risk of flooding. It is therefore necessary	 that
stormwater solutions implemented today are built to a capacity that can i	nfiltrate the
amount of storm	water runoff expected in the future.
A commonly applied method to adjust the amount of surface water runoff for climate
change, is to multiply the 	precipitation intensity with a factor for expected relative
increase, called a climate factor (COWI 2014). 	The climate factor can vary with the return
period of precipitation.	8 For example, 	the probability of 	a precipitation event with a return
period of 2 years may be expected to increase by 20 	per cent	, while it may be	 expected
to increase by 	30 	per cent	 for	 a 10	-year event	 (Zhou et al. 2013)	.
Since climate change evolves gradually and large uncertainties a	re inherent, the CBA
should include a baseline scenario both with and without the expected climate change.
This information is useful since it illustrates whether climate change adaptation
measures will be worthwhile even in the absence of climate change	 (Zhou et al. 2013)	.
Vulnerabilit	y
Vulnerabilities	 describe the 	number of humans, buildings, items etc, present at the
location involved and the potential adverse effects caused by their exposure to the
hazard (Zhou et al. 2013)	.

8 The probability of a flood occurring is typically described by the return period, which is a statistic
measure of the average recurrence interval of an extreme climatic event (Haynes and others 2008
in Zhou et al. 2013). For example, a flood 	with a return period of 100 years is expected to occur
once every 100 years. In other wo	rds, each year there is a 1 per cent	 probability of this type of
flood event occurring. In the same way, a return period of 50 years means the flood is expected
to occu	r once	 every 50 years, or have a 2 per cent	 probability of occurring each year, and so on.

Cost	-Benefit Analysis of Climate Change Adaptation Projects
Vista Analyse 	 	 	25
The 	adverse effects can be categorised into direct and indirect effects. A list of potential
adverse effects is given in 	Text b	ox 4	.1.	 The list is not exhaustive.
Text box	 4.1 Potential adverse effects from floods

Source: Vista Analyse	 and COWI	 (2015)
Note: The list is not exhaustive
The costing o	f flooding can be based stage	-damage curves, whi	ch show the damage as
a function of the 	extent and 	depth	 of floods	. However, due to 	the complexity of urban
contexts	, costing in cities is often based on unit costs of flooding of specific assets (	Zhou
et al. 2012, Apel et al. 2006 and Ballestos	-Canovas et al. 2013 in 	Olsen et al.	 2015).
The unit costs sh	ould ideally include both direct and indirect adverse effects. 	Unit costs
for material damages	, such as damage to buildings,	 can for example be derived from
insurance 	pay	-outs	 after historic flood events	. It is often more challenging to derive
estimates/re	trieve 	information about indirect effects	 (e.g.	 contamination of water bodies	).
as these are non	-market effects. A description of methods that can be used to value
these effects is given in section 	3.5.2	 and Appendix A	.
Once unit costs for different asset groups / types of adverse effects have been
established, t	he vulnerability can be measured using a GIS	-based risk model which
identifies flooded properties and the threshold values at which various damage classes
will be flooded (Olsen et al. 2015).
An alternative approach is to apply average market insurance premiums for water	-
related damages in an area. 	This information could be retrieved from private insurance
companies or public data bases. 	However, this is not an ideal approach due 	to the
heterog	eneity of cities; t	he size of the damage will vary considerably depending on the
types of assets damaged in the flood.
If the 	adaptation measure is expected to 	prevent damage to one type of asset	, the
vulnerability anal	ysis could focus on this	 asset	 group	. For example, if rain gardens
implemented in a residential area largely are expected to prevent flooded basements,
one could apply the average value of insurance claims for flooded basements for the
estimation of damage costs	.
Direct adverse effects:
-	Damage to bui	ldings
-	Damage to inventory, machinery etc. inside buildings
-	Damage to infrastructure such as roads and railroads, water and
sewerage system, power cables, and telecommunication 	cables.
-	Erosion
Indirect adverse effects:
-	Lost production and turnover for businesses
-	Costs related to traffic restructuring and delays
-	Loss, inconvenience, and damage from power cuts
-	Contamination of water bodies
-	Cost of time spent on administration and c	lean	-up efforts in the
aftermath of floods
-	Negative health effects

Cost	-Benefit 	Analysis of Climate Change Adaptation Projects
26	 	 	Vista Analyse
An	 example fro	m Oslo of how	 insurance data could be	 used to estimate the potential for
avoided damage from floods from blue	-green solutions in an area called Ensjø is given
in 	Text box 	4.2	. It should be noted that this is a simplified example which does not
consider the effects of c	limate change, does not provide a complete picture of potential
damage costs (indirect effects are not considered	), and does not	 contain sufficient
information about the effects of the proposed blue	-green measures on flood risk
compared to the conventional	 solutions.
Text box	 4.2 Estimated avoided damage based on insurance premiums 	– example from
Oslo
Ensjø area in Oslo
Ensjø area in Oslo has been subject to 	a major transformation in recent years. The
area	 has been redeveloped from an industrial area with factories and car industry to a
residential and commercial area. As part of the transformation	, large investments have
been made into creating	 new infrastructure	, open public spaces and blue	-green
infrastr	ucture. The blue	-green infrastructure includes a surface	-based system for
stor	mwater management, whereby rain	water from surfaces (roofs, streets, parking
lots)	 is collected in open channels	 and retained in pools before being led into a re	-
opened stream. Th	e system for surface	-based stormwat	er management is built to
withstand	 a floo	d event with a	 10	-year return period.
To estimate the avoided damage from floods from the surface	-based system, we have
collected data from Finance Norway	, which is the industry 	organisation for the financial
industry in Norway,	 showing the number of insurance claims related to water damage
and the value of these claims in Oslo municipality for the seven	-year period from July
2007 to June 2014. The claims are from both private hou	seholds and businesses.
Note that the data does not include publicly owned building	s in Oslo and does
therefore not provide complete information about the extent of the damage. However,
the data should be relatively representative of the damages incurred b	y private
households and businesses.
We have used numbers for water damages	 that arise from	 “intrusion	 from outside,
above ground or 	through ground” due to	 “precipitation, meltwater, groundwater”	.9
Table	 Insurance claims	 (number and amount) related to prec	ipitation in Oslo 2007	-2014
Oslo Municipality,
Insurance damages from surface water
runoff
Number of
damages
Amount
2007	-2014 (7 years)	 	4627	 	212,6 million
NOK
Average per year	 	661	 	30,4 million	 NOK
Source: Finance Norway in Vista Analyse (2014), table 	4.1.
The numbers in the above table show that 	damages	 from July 2007 to June 2014
amounted to 213 million NOK, a yearly average of 30 million NOK. This is considered
a conservative number since many damages are not captured by the data. 	We assume

9 We have also assumed that the companies reporting insurance claims to Finance Norway have
a market share of 86 	per cent	 in Oslo and that there is an average excess	 requirement	 of 4,500
NOK for each claim.

Cost	-Benefit Analysis of Climate Change Adaptation Projects
Vista Analyse 	 	 	27
Oslo muni	cipality has the potential to reduce 	costs by 30 million NOK per year if it can
prevent these damages.
Additionally, the frequency and intensity of rain storms is predicted to increase in the
future 	because of	 climate change, which would increase the pote	ntial damages.
However, the effect of climate change has not been considered in this example.
What proportion of this potential can be realised	 by the introduction of stormwater
solutions	 in Ensjø? We have made a rough estimat	e of this effect by stipulat	ing the
share of damage costs in Ensjø based on the total damage costs for Oslo. 5000	-7000
new apartments have been planned at Ensjø, which is 1.6 	- 2.2 	per cent	 of the total
number of households in 	Oslo in 2012; 316,423	 (SSB 2012). 	Based on this, w	e have
assumed that the total number of households at Ensjø will be around 2 	per cent	 of the
total number of households in Oslo. We do not know what share of Ensjø’s planned
100,000 m	2 of industrial area would be of the total industrial area in Oslo. For simplici	ty,
we will assume that it will equal the share of households; 2 	per cent	.
Based on these assumptions we can estimate that around 2 	per cent	 of the annual
damages in Oslo would occur at Ensjø if the area has conventional solutions for
stormwater management, with a standard	 equal to the average in Oslo.
If the 	local surface	-based system will prevent these water	-related damages, 	Ensjø
could save annual costs	 of around 600,000 NOK per year (2 	per cent	 of the annual
costs for Oslo). 	Assuming a life span 	for the local surface	-based system 	of 	40 years,
and a social discount rate of 5 	per cent	, the present value of the 	damage	 costs
(discounted over 40 years) is ap	proximately 10.3 million NOK. In a CBA, the present
value of the benefits (here, avoided flood damage) should be compared with the
present value of investment costs and any other costs incurred by the project.
Source: 	Example adapted from 	Vista Analyse 	(2014	), pp. 33	-39.
Expected annual damage
Combining the knowledge of the hazard with the vulnerability gives an estimate of the
Expected Annual Damage (EAD) of floods in an area. 	See Olsen et al. (2015), Zhou et
al. (2013) and Zhou et al. 	(2012) for detail	ed descriptions of how the EAD could be
estimated using hydraulic and statistical modelling.
Ideally, the city would have pre	-prepared flood risk predictions that can be used as input
to the analysis. However, if the analyst does not have access to hydrau	lic models or
flood risk maps of the area, a simplified approach would be to collect data on floods that
have affected the area in the past and the conditions under which these floods occurred.
This approach would only be relevant for relatively small area	s, for which it is possible
to link previous floods, the conditions that caused these floods and the damage caused
by the flood. For example, 	let us assume a rain garden is considered for a residential
garden that has experienced flooding of its basement s	everal times in the past. In this
case, one	 could collect historic data on the number of times the property’s basement has
been flooded, the conditions under which this happened (e.g. how many mm of rain over
what duration of time), and the cost of	 the damage caused each time the basement was
flooded	. A simplified prediction of the likelihood of future	 floods could for example
assume	 that the flood profile of t	he property will be the same in	 the future as it has been
in the past, with the same assoc	iated damage cost. 	Further, one would assume that the
impact of the rain garden is somewhere between zero and full removal of flooding of the
basement.	 Accounting for climate change, however, 	is more complicated	 as one would
have to relate predicted future	 changes in precipitation / weather conditions with the

Cost	-Benefit 	Analysis of Climate Change Adaptation Projects
28	 	 	Vista Analyse
likelihood of floods occurring. This could for example be done by identifying a threshold
level at which the basement would flood, and assess the change in likelihood of this
threshold being reached i	n the future.
In general, the cost and effort necessary to undertake the analysis should be proportional
to the extent of the measure(s) being considered.
4.3	 The alternative scenario; rain garden
As already mentioned, we will assume that there has been a sel	ection process prior to
this analysis, from which 	a rain garden	 is assessed to be the most suitable measure for
an	 area. 	Other alternative scenarios which would have been natural to assess include
the use of conventional solutions (expansion of the drainag	e system)	 and other blue	-
green measures (e.g. green roofs).
To establish the alternative scenario, 	it is necessary to assess the costs and benefits of
implementing 	a rain garden	 relative to the baseline scenario. This is discussed further in
sections 	4.4	 and 	4.5	.
4.4	 Costs
The costs of rain gardens can be categorised into investment costs, operation and
maintenance costs, and the opportunity cost of land use. So far there is little experience
with the im	plementation of 	rain gardens in Poland, so	 information about costs of rain
gardens is limited. For specific installations of rain gardens being considered, the
responsible firm should be able to provide an estimate of the costs required for the
investment 	and operation/maintenance of their proposed rain garden.
Investment costs
The cost	 of 	implementing 	a rain garden depend	s on several factors, including its size,
soil conditions, location, design, time of implementation and the types of plants and
materials	 used.
According to the Minnesota Stormwater Manual, the surface area of a rain garden should
be 5 	– 10 	per cent	 of the area fr	om which it infiltrates storm	water runoff (MPCA 2008).
In addition to the size of the runoff	-area, the infiltration capacity of 	the filtering layer, the
intensity and duration of precipitation, and local requirements to the maximum allowed
amount of runoff into the sewerage system or streams, determine the appropriate size
of a	 garden bed (Paus and	 Braskerud 2013).
Rain gardens tha	t require drainage are generally more expensive than rain gardens
where the soil at the location can be used as filter medium. This will depend on the local
soil’s ability to infiltrate water. Clay soil is generally unsuited for infiltration and rain
garde	ns implemented in areas with clay soils will always need drainage (Paus 	and
Braskerud 2013).
Operation and maintenance costs
Costs related to the operation and maintenance of rain gardens depend on a range of
different factors, for example whether it is n	ecessary to replace the soil underneath and
the type of vegetation used.
Upkeep is important after a rain garden has been created to ensure that vegetation is
established. Once the vegetation is established, the need for maintenance is similar to
that of 	parks	, with watering during dry periods, mechanical weed control and fertilisation

Cost	-Benefit Analysis of Climate Change Adaptation Projects
Vista Analyse 	 	 	29
as needed. Slurry on the filter surface may also need to be removed (V	ista	 Analyse
2015).
It follows that, if the rain garden 	is implemented in a park, it would be reasonabl	e to
assume that the rain garden would not require additional operation and maintenance
cost above what is needed t	o maintain the park	.
Opportunity cost	 of land use
The implementation of a rain garden will 	require some area of la	nd. This has a cost
because the area could 	otherwise 	be	 used for something else	. A relevant question is
then; what is the value of this area of land in its best alternative use? To answer this
question	 in practice	, one can	 generally	 look at what the area w	ould have been used for
in the absence of the rain garden. If the rain garden would be implemented on a vacant
block 	that 	otherwise could have been used to build properties, a reasonable measure of
the opportunity cost of the land use could be the average 	land value (per m	2) in the area.
However, if the rain garden is implemented in a park, where the current use of land is
very similar to that of the rain garden (vegetative cover) one could assume that there 	is
no opportunity cost incurred from the implemen	tation of the rain garden.
4.5	 Benefits
4.5.1	 Avoided damage from floods
An 	important benefit of inve	sting in 	a 	rain garden is the	 avoided d	amage from future
floods	. The expected avoided damage	 is calculated as the difference between the
expected	 damage	 with and wit	hout adaptation, i	.e. the difference between the baseline
damage and the (residual) damage under adaptation.
The alternative scenario (implementation of	 a rain garden) would presumably have lower
costs associated with damage from floods, compared to the baseline scenario,
depending on the capacity of the rain garden to absorb and delay the flow of water and
what this translates into in 	terms of flood risk r	eduction. 	Additionally, the potential
damage from floods would also depend on the rain 	garden’s ability to avoid
contamination of water bodies	. The difference in damage cost between the alternative
scenario and the baseline scenario may amount to the full 	amount, or a portion of, the
damage cost.	 The below sections describe factors impacting a rain garden’s ability to
control the quantity and quality of stormwater runoff.
Water quantity control
A rain garden’s ability to control the quantity of water depend	s on its capacity to infiltrate
water as well as its ability to delay the flow of water entering the drainage system. A rain
garden with underdrain 	- leading water to the drainage system 	- infiltrate	s less water than
a rain garden with no underdrain (MPCA 	2008). The latter allows water to infiltrate to the
ground and is also better suited to restore groundwater supplies. Whether drainage is
necessary depends on the properties of the local soil. For example, drainage is needed
in areas with clay soil.
The c	apacity of a rain garden to infiltrate water is a complex process influenced by the
initial water content of the bioretention media, the capillary suction, and the pressure
head from the ponded water (Paus et al. 2016).	 Paus et al. (2016) find that the inf	iltration
capacity can be reasonably predicted based on the following parameters;
• 	Surface area

Cost	-Benefit 	Analysis of Climate Change Adaptation Projects
30	 	 	Vista Analyse
• 	The value for saturated hydraulic conductivity of the of the bioretention media
• 	The maximum level of water on the surface.
Higher levels of the above factors 	would result in a higher fraction of runoff infiltrated.
Also, site	-specific properties such as catchment size and slope, surface types, and time
of concentration have large impacts on the infiltration capacity	 (Paus et al. 2016).
Water quality control
Stormwater runoff carries 	various pollutants 	with it 	such as oil, fertiliser, pesticides,
sediment, and chemi	cals	 (Riverlink n.d.	). I	f left untreated	, stormwater runoff	 could
contaminate	 streams, rivers and lakes 	and potentially affect 	recreational activiti	es such
as swimming	 and fishing	, injure	 aquatic plants and animals	, and 	contaminate drinking
water	.
A rain garden can improve the water quality	 by filtering pollutants from stormwater runoff.
Particles in stormwater are withheld via sedimentation on the surface 	of the rain garden
and filtration through a filter medium. The effect from sedimentation can be increased by
ensuring slow inflows of water into the rain garden. The filter medium’s abil	ity to filter
pollutants depends largely on its grain distribution properties. The properties of the filter
medium also determine what type of pollutants that can be withheld (Paus 2016).
According to Paus (2016), a rain garden could reduce:
• 	Particles by 	around	 90 per cent
• 	Oil by 	around	 90 per cent
• 	Dissolved heavy metals (Cd, Cu, Pb, Zn) by	 around	 80 	– 90 per cent
• 	PAHs (Polycyclic Aromatic Hydrocarbons) by 	around	 70 	– 90 per cent
• 	Phosphate by	 around	 63 per cent
The benefits of the reduction of pollutant	s depend on where these pollutants would have
ended up in the absence of the rain garden and the impact this could hav	e on humans
and aquatic life	.
4.5.2	 Co	-benefits
The plants and vegetation of rain gardens can provide ancillary benefits (co	-benefits) in
addi	tion to the primary purposes of stormwater quantity and quality control. 	These co	-
benefits include;
- 	Noise reduction
- 	Improved air quality
- 	CO	2 capture and storage
- 	Local climate control
- 	Biodiversity
- 	Pollination
- 	Visual amenity
- 	Restoration of groundwater supply
The degree to which these co	-benefits are realised and their significance will depend on
several factors, including the size of green area provided by the rain gardens. Each of
the potential co	-benefits are described in further detail below.	 Methods to va	lue these
types of benefits (non	-market benefits) are described in 	Appendix A	.

Cost	-Benefit Analysis of Climate Change Adaptation Projects
Vista Analyse 	 	 	31
Noise reduction
Noise as a result of human activity can be a problem in urban areas	 and be experienced
as ‘noise pollution’	. Green infrastructure such as lawns, trees, and hedges can reduce
the noise by absorbing and reflecting sound waves.	 The noise is reduced directly
(absorption) and indirectly (reflection 	– the noise is spread over a larger area and is
experienced as less i	ntense) (Fang and Ling 2003).
Bolund and Hunhammar (1999) 	refer to studies with examples of the significance of
urban	 vegetation	 for the level of noise, where for example a lawn instead of concrete
ground cover can reduce the level of noise from the surro	undings by 3dB(A)	10. Noise
reduction is important because noise above certain levels have documented, negative
health effects on sleep, ability to concentrate etc. Noise can result in both physical and
psychological ailments. In cities, it can often be diff	icult to build sound baffles to a large
extent, which is often done along roads outside cities. Green infrastructure, including rain
gardens, can function as “softer” solutions for the problem of 	noise pollution in city
centres.
Improved air quality
Traffi	c, industrial activity, transportation,	 heating of houses and workplaces, etc. all
contribute to problems with low air quality in cities. Urban vegetation contributes to
improve air quality by filtering particles and polluting gases such as carbon monoxide
(CO), 	nitrogen dioxide (NO	2), and sulfur dioxide (SO	2) (Nowak 1994 and Escobedo and
others 2008 in Gom	ez-Baggethun and Barton; Bolund and Hunhammar 1999). 	The
ability to filter the air increases with the leaf area, which means that trees have a larger
cle	ansing effect than bushes, which in turn have a larger effect than grass (Givoni 1991).
Good air quality is imp	ortant to reduce 	respiratory 	disease 	and other negative health
effects. Poor air quality can lead to 	excess mortality and morbidity, 	more days of sick
leave, treatment expenses, and lower production and welfare.
CO	2 capture and storage
Photosynthesis is necessary for plants and trees to stay alive and grow. Photosynthesis
is a chemical process that converts, among other things, the gre	enhouse gas CO	2 into
biomass and oxygen (O	2). Urban vegetation 	- all that is green and alive 	- will therefore
help to bind CO	2.
Local climate control
Vegetation generally absorbs heat from the air by means of evapotranspiration.	11 In
addition, cities are 	typically warmer than surrounding, rural areas due to their energy
consumption and building mass (the heat	-island effect). For	 cities	 located	 in 	warm
climates	, green areas are therefore important to counteract this heat effect.
Biodiversity
Urban environme	nts have many ecosystem components that act as habitats for different
species. The variety in natural habitats / ecosystem components is also a	n important

10 Dec	ibels, a measure of noise/sound.
11 Extraction of water in the soil by evaporation from the surface an	d transpiration from 	plants	.

Cost	-Benefit 	Analysis of Climate Change Adaptation Projects
32	 	 	Vista Analyse
part of diversity.	12 Despite th	e constraints imposed by urbanis	ation, there is also a certain
animal a	nd plant life in cities. Relatively speaking, biodiversity is very low, but urban
areas often have a surprisingly high number of species of certain taxonomic groups.	13
In isolation, diversity	 of 	species	 is usually highest in medium urbanis	ed areas, and
decreasing with increasing urban structure 	(Go	mez	-Baggethun and Barton 2013	).
Biodiversity will therefore rarely be the main motivation for conservation and
management measures in urban areas.	 However, there are certain instances	 where
natura	l areas in or near cities may be important.
This presen	ce of 	species of plants and animals is something many people appreciate.
Watching squirrels, piglets, butterflies, frogs and salamander	s, birds and beautiful plants
can be	 an enrichment. 	Also, some peo	ple will value knowing that somewhere	 nearby
there is animal	 life, eve	n though they may never see the animals themselves	.
Both the existence value (non	-use value) and the actual value (use value) of physically
observing an animal or plant is th	us an impor	tant benefit	 related to green areas, trees,
open streams, rivers and water.
However, the composition and design of urban natural elements is important. Even if
something is green in colo	ur does not mean it replaces / maintains species diversity	 in
any way	. A	 lawn	 with short	-cut grass	 can be green, but is biologically a "lifeless desert".
This may mean that the existe	nce value is small.	 It should be noted that only	 a fraction
of species 	is able to survive in urbanized areas, if it is facilitated.
Pollinatio	n and spreading of seeds
As already mentioned, u	rban areas	 often house a relatively large number of species of
certain taxonomic groups. Two good examples of these are birds and bees. The roles of
both of these animal groups in an ecosystem include tasks such as spreading seeds and
pollinating. These are basicall	y very important and to some extent irreplaceable
processes, and one of the main reasons why nature is able to produce food. In urban
contexts, however, 	pollination	 is less important, but for flowers and trees in parks and
garden	s, as well as residents'	 gardens, it i	s an important ecosystem service	.
Amenity value
Green infrastructure can also add to the aesthetics of urban landscapes. 	However, if the
green infrastructure includes small installations that go unnoticed to the public eye (e.g.
rain gardens 	in private gardens), 	they 	are unlikely to	 impact the urban landscape in ways
that provide recreational benef	its	 (Zou et al. 2013). To have an i	mpact on amenity value,
the green infrastructure	 must 	generally 	be implemented large scale.
Restoration of ground	water supply
Cities deple	te groundwater by tapping it as water supply. Lower water tables can create
problems for groundwater	-fed streams, lakes and wetlands, which either dry up or are
instead sup	plied by dirtier surface water	 (Universi	ty of Wisconsin	-Mad	ison 2002)	. Rain
gardens ca	n replenish, or recharge, groundwater supply and thereby help counter these
effects.

12 The genetic variation, as the third component of biological diversity, may b	e less central in
urban contexts.
13 A group in the biological system 	that 	consists of one or more biological species, which are
usually thought to be related.

Cost	-Benefit Analysis of Climate Change Adaptation Projects
Vista Analyse 	 	 	33
4.6	 Parameters	 for calculation of net present value
4.6.1	 Social discount rate
As described in section 	3.5.4	, a social discount rate of 5 	per cent	 should be applied.
4.6.2	 Project period
The estimated costs and benefits of a project should cover a period appropriate to the
project’s economically useful li	fe and its likely long	-term effects (European Commission,
2014).	 The life span of a rain garden is determined by the first of the following three
events that occur (Paus 2016):
1. The filter medium is clogged and infiltration through the rain garden ceases
2. No	 remaining filtering	 capacity 	in the filter medium
3. The concentration of pollution builds up to too high levels
The first event has 	previously been thought to a limiting factor for the life span of rain
gardens. However, recent research shows that rain gard	ens can have a good infiltration
capacity after many years of operation (see Paus et al. 2014	b). This is thought to be due
to vegetation, 	which	 helps to maintain infiltration 	through the development o	f root
systems, as well as earth worms	, insects etc., which help make the filter medium more
porous over time.
The second event 	occurs when th	ere is no remaining filtering capacity of the rain garden,
and	 unfiltered pollutants can flow into the recipient. Studies have shown that the it can
tak	e several years before this happens, for example 40 years for zinc (see Paus et al	.
2014 and Paus et al. 2014c). 	A review of six existing rain gardens	 with	 varying operating
time (2 to	 8 years) also indicated a very good r	esidual capaci	ty for heavy metals 	(> 82%)
(see Paus et al. 2014b)	.
The third event occurs when the rain garden has withheld pollution 	to the point where	 it
constitutes 	a hazard 	according to	 health	-based acceptance criteria for contaminated
ground.	 For normal c	oncentrations of pollutants in	 stormwater 	this may be expected to
take a very long time	 as the concentration of pollution in water is low compared to 	these
acceptance criteria. Where rain gardens are implemented near 	residential areas,
kindergardens etc., 	the expected useful life shoul	d however	 be considered	 with this in
mind	 (Paus 2016)	.
Based on the above information the project period for an analysis of rain gardens would
need to be assessed based on the design, location of rain gardens, as well as observed
life spans. However, 	in th	e absence of such information, 	it appears reasonable to
assume a life span of 40 years.	 This life span was also applied in Vista Analyse	 and
COWI	 (2015).
4.7	 Concluding remarks
In this chapter, we have provided some guidance on issues to be considered, the kind
of methods that can be used etc. in CBAs of blue	-green measures, with a focus on rain
gardens. Since this is not a numerical example, it has not made sense to comment on
all steps of a CBA, as described in chapter 	3. For example, we have not commented on
the sensitivity analysis, distributional analysis, or overall assessment of the 	project, but
these will of course need to be included in actual applications of CBAs.

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34	 	 	Vista Analyse
Refer	ences
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Appendix A	: Methods for valuation of non	-market effects
The economic value of a 	change in a 	non	-market	 good or service	 is measured based on
people’s collective 	willingness to pay	 to achieve (or avoid)	 this change	. There are two
main categories of ap	proaches for the valuation of willingness to pay	 for non	-market
effects	; revealed and stated preference methods. 	Revealed preference methods	 rely on
observations of what people do, while 	stated preference methods	 ask people directly
about how they value di	fferent non	-market goods and services.
The revealed and stated preference methods are primary valuation studies which require
significant amounts of time, resources, and expertise to be conducted. Due to these
constraints, it is sometimes necessary to tra	nsfer adjusted value estimates from other
sites to the project sett	ing. This is known as	 value transfer	 (or ‘benefit transfer’)	. It is
however important to exercise caution when making such transfers. See Navrud and
Ready (2007) for a comprehensive discuss	ion of this method.
A further description of the methods for revealed preference, stated preference, and
value transfer is given below.
Revealed preference	 methods
The revealed preference method uses observations of people’s actions to infer their
valuati	on of various goods and services. Examples of such methods include the travel
cost method and the hedonic pricing method.
Travel cost method
The travel cost method uses the cost incurred by individuals travelling to reach a site,
and the cost of staying at the site as a proxy for the environmental value of that site. 	The
travel cost method is a lower bound in the actual willingness to pay 	– mos	t people will of
course value the recreational	 site	 distinctly higher than the cost of getting there. Over
time, they might find cheaper and more efficient ways of making the trave	l without this
implying that they value the	 site less. People who are fond o	f recreation may purchase
a home close to the site, without this implying that they value the site less than others.
There are also other challenges with this method, for example, that people like to have
more purposes with a journey and that the time 	sp	ent on 	the journey may not always be
considered a cost.
Hedonic pricing method
The hedonic pricing method estimates the value of a non	-market good by examining the
relationship between the non	-market good and the demand for some complementary
good that has	 a price in the market.	14 The most commonly used method internationally
is the hedonic pricing property method, which is based on the fact that the price of a
property is determined in part by the specific characteristics of the property’s structure,
locati	on and environmental characteristics. Environmental goods and services such as
landscape amenity, noise and air quality are included among the characteristics. A
property that has better environmental characteristics will presumably command a higher
market	 price than a similar property with worse characteristics.

14 A complementary good is a good that you buy less of if the “price” of the primary good increase	s
(which is to say that its quality decreases). 	Travel expenses 	to a recreational site 	is a
complementary good	 to the site itself, 	hence the 	travel cost method is actually a special instance
of the hedonic pricing method.

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Stated preference methods
Stated preference methods involve asking people if they are willing to pay to avoid
changes in 	a non	-market good or service	 and given that they say yes, how much they
are 	willing to pay, typically per year per household. One can either interview people or
reveal the willingnes	s to pay	 through referendums.
The main method that uses personal interviews is called contingent valuation.
Contingent valuation
This method construc	ts a hypothetical, or ‘simulated’, market via a questionnaire
methodology where respondents answer questions concerning what they are willing to
pay for a specified change.
In the interviews or the questionnaire, the respondents are asked hypothetical que	stions
about 	their willingness to pay to avoid negative changes in 	a non	-market good or service
or (more often) to achieve positive changes. The respondents are asked direct questions
to reveal what they are willing to pay for a given good (WTP = willingne	ss to pay) or will
require in compensation to give up (WTA = willingness to accept), under certain given
and specified assumptions.
It is impor	tant to describe the changes in non	-market goods or services	 so that the
respondents get a good understanding of 	the environmental changes in question. The
wording of the question can often significantly impact the willingness to pay people will
specify. It is therefore important	 to test 	for such effects	, and 	if possible,	 make the
necessary adjustments	.
Value 	Transfer method
When there are one or more valuation studies available for a good or service, one must
assess whether the estimated values could be transferred from the location of the origi	nal
study	 to the location to which one wishes to transfe	r the 	value	. This ki	nd of transfer is
often called benefit transfer	- However, the method encompasses both benefits and
damage	, and should instead be called value t	ransfer (Navrud 2004, Navrud and Ready
2007).
The benefit of the value t	ransfer method is that tran	sferring values from other studies
often is cheaper than conducting a primary study. Primary studies also often require a
significant amo	unt of time, and value transfer	 is therefore a faster method in comparison.
The weakness of the value t	ransfer method 	is that the uncertainty of the estimates
increases. There could be several significant differences between the primary studies
and the study to which one wishes to transfer the value estimates. For example, the good
or service could have different characte	ristics, the change in amount/quality could be
different, the availability of substitutes could be different, and the context for the valuation
could be different. In addition, there could be differences in income, education,
preferences, and attitudes amo	ng the affected households; which could lead to a
different valuation of the same environmental change (Navrud 2001).
These uncertainties are in addition to the uncertainties already inherent in the original
estimates. The increase in uncertainty in the es	timates by the value transfer must be
ev	aluated against the benefit of v	alue 	transfer in terms of reduced time and costs, as
well as an assessment of an acceptable level of uncertainty in the relevant situation
(Navrud 2004).

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Vista Analyse 	 	 	39
Nevertheless, in a practical b	enefit	-cost analysis of a projec	t (such as one or more rain
gardens	) there are several non	-market impacts to track in an analysis conduc	ted on
limited time, and value	 transfer of at least some of the impacts is unavoidable.
Th	ere are three main methods for	 value 	transfer (Navrud 2004; Navrud and Ready
2007):
1. 	Unit transfer
2. 	Transfer of Willingness	-to-Pay function
3. 	Meta	-analysis
Unit transfer
Unit transfer is the transfer of estimates of average willingness to pay for a certain
environmental good or service for	 the location of the original study to the location where
the new analysis is being conducted. This is the simplest form of value transfer	 and the
one that arguably is used the most often in	 practical CBA	. The transfer can be done with
or without correctio	ns of differences between the two locations. Corrections can be made
based on inflation, level of income, or expert opinions of differences between the original
and the new location.
One should strive to find a value estimate from a study that is as simil	ar as po	ssible to
the new location 	in terms of the change in the environmental good or service being
considered, socio	-economic characteristics of the population etc. The transfer could also
be based on estimates from several original valuation studies.
Transfer of the willingness	-to-pay function
The willingness	-to-pay function estimates the willingness to pay for changes in an
environmental good or service as a function of various explanatory variables (for
example income, education, use of the 	environmental good or service etc.). Estimation
of this function at the new loc	ation	 is done by using the same coefficients in the function
that was used for the original location	, but use the mean value from the new location for
the explanatory variables.	 This requires that the environmental change and the
explanatory variables are comparable, and that the preferences of the respondents are
the same	, for the new and 	the 	original location. One should strive to find an original
location that is as similar as	 possible to the new location. There also needs to be data
available 	for the explanatory variables (included in the willing	ness	-to-pay function) 	for
the new location.
If a unit transfer is subject to appropriate corrections for income difference etc	., the 	result
may be viewed a simple case of a willingness	-to-pay function.
Meta	-Analysis
Meta	-analysis is a statistical regression analysis of several previous valuation studies for
a certain environmental good, to assess how the willingness	-to-pay for the envi	ronmental
good varies with different characteristics of the good, the relevant population, and
aspects of the valuation method used. As every study is used as an observation, it is
problematic to perform meta	-analyses with few observations in the regressio	n analysis.
More than one e	stimate could be used from the s	ame study if for example one has used
different valuation questions in the original study, however one should then keep in mind
that estimates from the same study would be correlated.

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40	 	 	Vista Analyse

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