Twenty-eighth Report Adapting Institutions to Climate Change Cm ...

Efficiency
4.36 Efficiency is about achieving the best relationship between inputs and outputs. Operationally,
this often means using cost–benefit analysis (CBA), where the benefits and costs can each be
quantified, to decide whether the benefits of a policy or programme are sufficient to justify its
costs; alternatively, a cost-effectiveness analysis can be used, where the objective is given and the
task is to minimise the cost of achieving it. Efficiency in adaptation practice can be difficult to
measure: while costs are usually relatively straightforward to determine, benefits can be harder to
quantify because of uncertainties about the nature and extent of future climate change.
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As observed earlier, efficiency and equity objectives may be in tension, because the policies which
minimise resource use may lead to unfairness, for example by concentrating the costs of policies
on those least able to bear them. Advice to UK public authorities in assessing efficiency is that
they should follow the Treasury’s Green Book, 19 involving an approach derived from orthodox
economics and requiring, where feasible, the use of formal cost–benefit analysis, and this is now
recommended by the Department for Environment, Food and Rural Affairs (Defra) for appraisal
decisions throughout Government.
Cost–benefit analysis is most useful where problems lie in the ‘risk’ quadrant in Figure 4-I above.
However, the problems surrounding adaptation to climate change lie firmly in the other quadrants,
making application of CBA problematic. While costs of action are often well defined, benefits in
the case of adaptation are often difficult to define with any precision and may lie in a distant future.
It is still necessary to decide how best to use scarce resources, but it will sometimes be necessary
to use CBA where an objective is defined, and then the cheapest alternative way of fulfilling it
will be preferred.
Even where benefits can be clearly defined, cost–benefit analysis has limitations. First, benefits
are measured by observing or inferring people’s willingness to pay. There are two issues here:
consumers and citizens do not have the necessary knowledge to make rational decisions about
the benefits of, say, biodiversity in 50 years’ time; and, secondly, people’s willingness to pay is
constrained by their ability to pay, i.e. by income inequalities. Government advice sometimes
recommends that compensation for these inequalities should be brought into CBA by a weighting
scheme that gives higher relative values to the views of, and impacts on, the poor. While this
is attractive, it also undermines one of the important theoretical claims of ‘pure’ CBA, which
is that it provides a guide to an efficient decision under the given distribution of income, i.e. that
the project with the highest value represents the socially most efficient (resource-minimising or
benefit-maximising) outcome. Where income or other weightings are used to achieve social
goals, CBA can no longer claim theoretical pre-eminence over other more pluralistic methods of
appraisal, often encompassing multiple objectives and involving direct input from stakeholders
and the public.
In addition, CBA suppresses the visibility of the multiple objectives that policy often pursues
by putting single monetary values on appraisal outcomes. For adaptation (as in other areas
of policy, such as radioactive waste management), 20 equity objectives as well as economic
objectives are significant and it is important to explore analytical techniques that explicitly
incorporate multiple objectives.
The second limitation of cost–benefit analysis concerns valuation over time, when, as in the case
of adaptation, long-term outcomes are important. Conventionally, CBA uses a positive discount
rate – in other words, costs and benefits are given progressively lower valuations the further into
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Chapter 4