Risk-based Decision Making for Climate-Smart Water Investments

1. Risk-based Decision Making for Climate-Smart Water Investments Bridging the Financial Gap for Adaptation 5th World Water Forum 18 March 2009 Istanbul, Turkey Vahid Alavian Water Advisor The World Bank

2. Outline Context and motivation Concerns and issues Risk-based prioritization and decision making Risk-based assessment framework Adaptation options and investment prioritization should be based on formal risk assessment

3. Climate change impact is uncertain Projected % change in Runoff 2030 Projected % change in Runoff 2050

4. Water investments are exposed Exposure of Water Investments to Change in Runoff Water Investments* FY 06 – 08: $8.7 b FY 09 – 10: $10.6 b * Includes projects with > 20% water component

5. The concern … • Current water management practices may not be robust enough to cope with the impacts of climate change on the water sector investments. • Water managers routinely deal with the uncertainty of historical climate variability, but climate change introduces additional uncertainty, difficult to address. • It is difficult to convince decision makers to act now, because of the uncertainty. • Policy makers and politicians are not comfortable with risk and probability. They want hard and fast numbers.

6. What is needed … • A ‘paradigm shift’ in the methods used for justifying water resources investments and projects. • Hydrologic tools for dealing with a non-stationaryclimate, and mechanisms for incorporatinguncertain and qualitative climate changeinformation in the decision process. • Decisionframeworks that can absorb this information asthe basis for deciding among generally costly options –from a social, economic, environmental and equitystandpoint. • Operation and evaluation rules for infrastructure designed to copewith climate uncertainty, e.g., risk - cost effectiveness, high risk – high reward. • A process that promotes flexible decision-making that can be adjusted as outcomes from management actions and climate events become better understood.

7. Terminology • Risk: probability or likelihood of occurrence of a consequence. • Consequence: level of exposure to a defined hazard. • Uncertainty: quality of knowledge concerning risk. • Uncertainty may affect both the probability and consequence components of the risk • The primary purpose of adopting a risk-based approach to decision-making is to ensure that uncertainty is understood and managed in the decision-making process.

8. Overarching concepts for decision making under increased uncertainty • Managing risk and uncertainty in the water sector is not new. • The decision process and many of the options to improve the resiliency of water systems are essentially the same with and without climate change. • “No regrets”, “good practice”, “sustainable”, etc. actions can be justified with or without climate change. • Demand management increases efficiency and productivity under all conditions • Intelligent and flexible design and operation of water infrastructure • “Climate-change justified” actions are different. They require: • More care in measuring impacts, including on drivers • More precise assessment of system vulnerability and risk • A deliberate decision on the degree of risk to be taken • Justification of additional adaptation costs

9. Decision making under uncertainty Good Good knowledge of risk: • Stationary climate • Good historical data • Good impact models • Short-term predictions Ambiguity about risk: • Uncertain or unknown impacts • No impact models • Uncertain how to value consequences • Lack of concern Knowledge of likelihood Impacts well-defines, likelihood uncertain: • Poor knowledge of likelihood of damage • Good impact/process models • Well defined impact • Longer term assessment Ignorant about risk: • Rapidly changing climate • Unknown processes • Complex dependencies • Insufficient data Poor Knowledge of consequences Poor Good Source: Willows and Connell, 2003

10. Operational indicators • Water system performance indicators - the probability that a system will provide the intended level of services under a defined set of conditions for: • Reliability -- likelihood that services are delivered within a given period • Resiliency -- manner in which a system recovers from shock or failure • Robustness -- degree to which a system can be impacted by external factors. Severity of the expected consequences of shock or failure

11. Decision framework - 1 • Identify the problem and key issues • Identify exposure components • Identify system components • Distinguish between water service delivery and water management systems • Establish performance criteria and threshold • Type: reliability, robustness, resilience • Traditional: water level, flow, flood damage, power generation, etc.

12. Decision framework - 2 • Identify rules for decision making and prioritization • Cost-benefit, cost effectiveness, multi-criteria analysis, risk aversion level, risk-reward analysis, etc. • Assess risks • Identify climate and non-climate parameters • Evaluate coping ranges, critical threshold • Prioritize risks and assess extent of uncertainty • Identify and evaluate options and alternatives to reduce risks • Prioritize and assess cost of adaptation

13. Risk assessment – UKCIP model Source: Willows and Connell, 2003

14. Risk assessment – Australia model Source: Broadleaf and MJA, 2006

15. Application ... work is starting Evaluate CAS World Bank Project Cycle Complete Ident. Prepare Implement Appraise Negotiate Review extent to which Climate Change is seen as a significant factor in the assistance strategy and the lending program Monitor, Evaluate, Review Discuss significance of climate change and agree on scope of incorporating it in the project Carry out necessary analysis to assess the impact and to evaluate options Implement Appraise project with and without Climate Change factor …..

16. Project Preparation Decide on approach based on objectives System Characterization Bottom Up (Threshold) Top Down (Scenario) Analysis Risk Assessment Adaptation Options Prepare CAS Identify Negotiate Implement evaluate Appraise Complete Project Cycle (investment process)

17. Project Preparation Bottom Up (Threshold) Top Down (Scenario) System Characterization Define driving climate and non-climate variables Define driving climate and non-climate variables Analysis Define thresholds Select climate change scenario Define performance criteria Perform downscaling Risk Assessment Assess sensitivities to climate variables Carry out hydrologic analysis Adaptation Options Prepare CAS Identify Negotiate Implement evaluate Appraise Complete Project Cycle (investment process)

18. Project Preparation Bottom Up (Threshold) Top Down (Scenario) Risk Assessment System Characterization Determine system response Determine system response Screening Risk Assessment Determine consequences of the response Assess impacts and vulnerabilities Analysis Assess system vulnerabilities Qualitative Risk Assessment Risk Assessment Quantitative Risk Assessment Adaptation Options Prepare CAS Identify Negotiate Implement evaluate Appraise Complete Project Cycle (investment process)

19. Project Preparation Screening Risk Assessment Qualitative Risk Assessment Quantitative Risk Assessment System Characterization No or low regret path Climate Justified path Analysis Risk Assessment Adaptation Options Prepare CAS Identify Negotiate Implement evaluate Appraise Complete Project Cycle (investment process)

20. Adaptation options analysis