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Cost-Effectiveness AnalysisBox 3. More Advanced Lessons from Mitigation Cost-Effectiveness AnalysisA number of lessons of relevance for adaptation have emerged from the widespread use of CEA inmitigation.• CEA tends to work with technical costs, omitting important policy and/or transaction costs, whichneed to be factored in when moving to policy implementation. For this reason, they underestimatethe costs of options (and overestimate the relative cost-effectiveness). These policy costs shouldbe factored into analysis.• Cost curves can be divided into expert-based and model-derived curves. Expert-based curvesassess the cost and reduction potential of each single abatement measure, while model-derivedcurves are based on a range of partial- or general-equilibrium models. For adaptation, most initialassessments are likely to be expert based, but there may be potential for modelling in some futureareas.• Cost-effectiveness usually optimises to one attribute, but in practice, policy options need toconsider many elements, whether expressed in monetary or non-monetary terms. There havebeen some applications of CEA which seek to build in ancillary effects, either through the use ofcost-effectiveness adjustments or through multi-optimisation analysis. These involve a stepchange in complexity and resources, but do provide much more robust results.• A key area of discussion has centred on discount rates, and whether to use a social or privatesector discount rate. Recent examples have undertaken sensitivity analysis with both to examinewhether this alters the ranking and overall costs of compliance.• Baseline assumptions, including the technology and reference costs (e.g. future energy prices),have a significant impact on the cost-effectiveness analysis. Such socio-economic drivers areknown to be as important as climate drivers for adaptation, and need to be taken into account inanalysis.• Most MACC assessments have limited feedback between sectors or even time periods.Furthermore, they are defined with respect to a certain year. These issues are more important foradaptation.• There has also been a debate around learning curves and innovation, which are important indetermining the balance of current versus future options. This is something which requiresconsideration in the adaptation domain, albeit in more complex assessments.Building Adaptation Cost Curves Using Economic Valuation• A number of recent assessments of adaptation have taken the marginal abatement cost curveconcept used for mitigation, but used monetary values to define effectiveness. In essence, thisjust undertakes cost-benefit analysis, but presents results so that they look like a mitigation costcurve.• The MEDIATION project has reviewed this approach and does not recommend it for adaptation.• This is because the approach tries to force adaptation to fit a decision framework targeted formitigation. It does not solve any of the issues raised above on cost-effectiveness analysis, i.e. ittreats adaptation as a simple linear process, focused on technical options, and most importantly,it has little consideration of uncertainty.• Furthermore, it introduces a new problem with respect to the challenge in estimating monetaryvalues for many sectors of interest to adaptation (health, ecosystem services), as well as capacitybuilding and non-technical options, which are a priority for early adaptation.9