Economic Evaluation of Lesotho Investment Under Climate Change

The principles of Cost Benefit Analysis (CBA) are based on assumptions of perfect information on costs, benefits and the projection of costs and benefits in the future. In practice, these conditions do not hold, especially in the case of investment in developing countries with naturally high climatic variability, political instability, and rapid changes in demographic characteristics. This paper explores uncertainty in the financial analysis of environmental engineering projects under climate change via a bottom-up approach to economic evaluation. Drawing from previous work done on the decision-tree framework (DTF) and decision making under deep uncertainty (DMDU) methods, the methodology begins with characterizing project uncertainties and climate hazards, then proceeds with building models of the system that relate climate variables to metrics of economic evaluation. Afterwards, a sensitivity analysis is performed on the uncertain variables and the robustness of proposed investment is assessed by monitoring the response of economic metrics. In the study, streamflow is assessed as measurable metric of climate uncertainty upon which sensitivity analysis is performed to better understand the impact of climate uncertainty on water-related projects, and subsequently the viability of proposed investments. As a contribution to improved rational decision making under climate uncertainty, the study demonstrates the sensitivity of the economic rate of return (ERR) to project uncertainty, defines project robustness using a robustness index and proposes alternative adaptation options. Furthermore, the performance of alternative options, including integrated catchment management (ICM) plans under climate change is explored.