I received some fantastic news in time for Christmas (although failed to post a blog until now) – my application for a CSIRO Climate Adaptation Flagship top-up PhD scholarship has been successful. My topic is entitled ‘Economics of climate adaptation: Using economic theory to identify adaptation options at different scales’.
With this scholarship, I aim to expand on my research into the economics of carbon farming to look more broadly at common climate mitigation options – such as carbon offsets – from a climate adaptation perspective.
When considering climate mitigation options, it’s common to use standard cost-benefit analysis to establish their economic viability. For example, when calculating whether it’s worthwhile for a landholder to participate in the carbon farming initiative, we want to consider the potential benefits (carbon price x carbon sequestered), costs (land value, management, market participation costs) – and then determine the net present value of carbon farming over a particular time frame (currently the CFI requires carbon sinks to remain in place for 100 years).
However, this type of analysis makes a few crucial assumptions that make it not so suitable for climate adaptation. Firstly, it’s usually assumed that the carbon price either remains constant over that time period or follows some basic linear projection (e.g 4% increase pa). Secondly, we’re also ignoring the possible risks that climate change will bring within the next century – whether it be direct risks to the carbon offset vegetation (e.g temperature, rainfall changes), or possible land use changes. Unfortunately, these uncertainties are not often properly accounted for in economic analyses of climate adaptation options.
I’ll be investigating a few different methodologies that take a risk-based approach to analyse the costs and benefits of different climate adaptation options, such as real options analysis and modern portfolio theory. I hope this work will assist in the development of incentives and policies for climate adaptation in Australia, as well as identifying potential economic and policy barriers.