- Conference Proceedings Paper
Abstract: 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. Using a case study of the Metolong Dam in Lesotho, which supplements water supply to a textile factory, uncertainty in climate-informed economic evaluation is explored by estimating the number of factory workers from water availability. For the project timeline of 30 years, temperature is not expected to rise more than 2 ⁰C over historical values, and precipitation changes are estimated to be within ±10% of current annual totals, so detrimental effects associated with water budgets from the hydrologic cycle may not be a significant threat near-term. However, uncertainty in water allocation rates and reservoir release which proved consequential when combined with climate change were discovered. After vulnerability analysis, the project was found to be robust to only 9.6% of the considered future scenarios. Overall, the project is judged to have minimal climate risk but high uncertainty, so flexible adaptation strategies that provide incremental robustness to the project are recommended to avoid infrastructure redundancy and waste of resources. By demonstrating the sensitivity of the economic rate of return (ERR) to uncertainty, defining project robustness using a robustness index and proposing alternative adaptation options, this study contributes to on-going efforts towards improved rational decision making under climate uncertainty.