IDEAS home Printed from https://ideas.repec.org/a/eee/ecolec/v200y2022ics0921800922001902.html
   My bibliography  Save this article

Decision tools for adaptation to climate change: Portfolio analysis of tea plantation investments in Rwanda

Author

Listed:
  • Fraschini, Filippo
  • Hunt, Alistair
  • Zoboli, Roberto

Abstract

Climate change produces new challenges to the development strategies of the most vulnerable countries, where there is urgent need of effective adaptation policies. However, the uncertainty about the expected costs of climate change and about the benefits of adaptation hampers the design and the implementation of adequate measures. Alternative decision-support tools and decision strategies can be adopted by policy makers and the private investors. In this paper, we assess the effectiveness of Portfolio Analysis (PA) as a decision-support tool for adaptation strategies under different climate change scenarios. PA effectiveness is explored in the context of tea plantation investments in Rwanda. Tea is a key commodity for the Rwandan economy, and the agriculture sector is one of the most negatively affected by climatic changes, especially in developing countries. It is a perennial crop, for which investments have high sunk costs and economic returns are highly sensitive to changes in the average temperature and in rainfall distributions. Thus, returns on investments in new tea plants are affected by high climate-induced uncertainty. PA aggregates different investment options into portfolios, instead of considering a single option, and allows identification of an efficiency frontier of best portfolios in terms of trade-off between economic efficiency (expected net present value) and risk (variance of the economic performance). In spite of its advantages, PA remains rarely used in climate change adaptation analysis. In this paper we show how PA can be performed in practice when evaluating adaptation investments against different climate change scenarios. The results show that, using PA, new possible allocations of resources emerge, identifying alternative investment solutions with a better trade-off between economic return and risk. PA here emerges as an effective tool in designing long-term investments in the agriculture sector, robust to the complex and uncertain effects of climate change. A Sensitivity analysis of the results to different social discount rates and different climate change scenarios suggests how these two factors can be relevant for the choice of investment portfolios.

Suggested Citation

  • Fraschini, Filippo & Hunt, Alistair & Zoboli, Roberto, 2022. "Decision tools for adaptation to climate change: Portfolio analysis of tea plantation investments in Rwanda," Ecological Economics, Elsevier, vol. 200(C).
  • Handle: RePEc:eee:ecolec:v:200:y:2022:i:c:s0921800922001902
    DOI: 10.1016/j.ecolecon.2022.107528
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0921800922001902
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ecolecon.2022.107528?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sam Fankhauser, 2017. "Adaptation to Climate Change," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 209-230, October.
    2. Anna Nowogrodzki, 2019. "How climate change might affect tea," Nature, Nature, vol. 566(7742), pages 10-11, February.
    3. Marjolijn Haasnoot & Hans Middelkoop & Astrid Offermans & Eelco Beek & Willem Deursen, 2012. "Exploring pathways for sustainable water management in river deltas in a changing environment," Climatic Change, Springer, vol. 115(3), pages 795-819, December.
    4. Kenneth J. Arrow & Maureen L. Cropper & Christian Gollier & Ben Groom & Geoffrey M. Heal & Richard G. Newell & William D. Nordhaus & Robert S. Pindyck & William A. Pizer & Paul R. Portney & Thomas Ste, 2014. "Editor's Choice Should Governments Use a Declining Discount Rate in Project Analysis?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(2), pages 145-163.
    5. Joeri Rogelj & Michel den Elzen & Niklas Höhne & Taryn Fransen & Hanna Fekete & Harald Winkler & Roberto Schaeffer & Fu Sha & Keywan Riahi & Malte Meinshausen, 2016. "Paris Agreement climate proposals need a boost to keep warming well below 2 °C," Nature, Nature, vol. 534(7609), pages 631-639, June.
    6. Nina Hall, 2017. "What is adaptation to climate change? Epistemic ambiguity in the climate finance system," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 17(1), pages 37-53, February.
    7. W. Neil Adger, 2003. "Social Capital, Collective Action, and Adaptation to Climate Change," Economic Geography, Taylor & Francis Journals, vol. 79(4), pages 387-404, October.
    8. Knoke, Thomas, 2008. "Mixed forests and finance -- Methodological approaches," Ecological Economics, Elsevier, vol. 65(3), pages 590-601, April.
    9. Paul Watkiss & Alistair Hunt & William Blyth & Jillian Dyszynski, 2015. "The use of new economic decision support tools for adaptation assessment: A review of methods and applications, towards guidance on applicability," Climatic Change, Springer, vol. 132(3), pages 401-416, October.
    10. Sterner, Thomas & Tol, Richard S. J. & Weitzman, Martin L. & Pizer, William A. & Portney, Paul R. & Arrow, Kenneth J. & Cropper, Maureen L. & Gollier, Christian & Groom, Ben & Heal, Geoffrey M. & Newe, 2014. "Should Governments Use a Declining Discount Rate in Project Analysis?," Scholarly Articles 33373349, Harvard University Department of Economics.
    11. Martin L. Weitzman, 2011. "Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 275-292, Summer.
    12. Lea Berrang-Ford & A. R. Siders & Alexandra Lesnikowski & Alexandra Paige Fischer & Max W. Callaghan & Neal R. Haddaway & Katharine J. Mach & Malcolm Araos & Mohammad Aminur Rahman Shah & Mia Wannewit, 2021. "A systematic global stocktake of evidence on human adaptation to climate change," Nature Climate Change, Nature, vol. 11(11), pages 989-1000, November.
    13. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    14. Yemshanov, Denys & Koch, Frank H. & Lu, Bo & Lyons, D. Barry & Prestemon, Jeffrey P. & Scarr, Taylor & Koehler, Klaus, 2014. "There is no silver bullet: The value of diversification in planning invasive species surveillance," Ecological Economics, Elsevier, vol. 104(C), pages 61-72.
    15. Alexandra Lesnikowski & James Ford & Lea Berrang-Ford & Magda Barrera & Jody Heymann, 2015. "How are we adapting to climate change? A global assessment," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 20(2), pages 277-293, February.
    16. Matthies, Brent D. & Kalliokoski, Tuomo & Ekholm, Tommi & Hoen, Hans Fredrik & Valsta, Lauri T., 2015. "Risk, reward, and payments for ecosystem services: A portfolio approach to ecosystem services and forestland investment," Ecosystem Services, Elsevier, vol. 16(C), pages 1-12.
    17. Dittrich, Ruth & Wreford, Anita & Moran, Dominic, 2016. "A survey of decision-making approaches for climate change adaptation: Are robust methods the way forward?," Ecological Economics, Elsevier, vol. 122(C), pages 79-89.
    18. Sanchirico, James N. & Smith, Martin D. & Lipton, Douglas W., 2008. "An empirical approach to ecosystem-based fishery management," Ecological Economics, Elsevier, vol. 64(3), pages 586-596, January.
    19. Robin Gregory & Graham Long, 2009. "Using Structured Decision Making to Help Implement a Precautionary Approach to Endangered Species Management," Risk Analysis, John Wiley & Sons, vol. 29(4), pages 518-532, April.
    20. Mallory, Mindy L. & Ando, Amy W., 2014. "Implementing efficient conservation portfolio design," Resource and Energy Economics, Elsevier, vol. 38(C), pages 1-18.
    21. Sam Fankhauser, 2017. "Adaptation to Climate Change," Annual Review of Resource Economics, Annual Reviews, vol. 9(1), pages 209-230, October.
    22. Hallegatte, Stephane & Shah, Ankur & Lempert, Robert & Brown, Casey & Gill, Stuart, 2012. "Investment decision making under deep uncertainty -- application to climate change," Policy Research Working Paper Series 6193, The World Bank.
    23. Luz Maria Castro & Baltazar Calvas & Thomas Knoke, 2015. "Ecuadorian Banana Farms Should Consider Organic Banana with Low Price Risks in Their Land-Use Portfolios," PLOS ONE, Public Library of Science, vol. 10(3), pages 1-23, March.
    24. Cameron M. Pittelkow & Xinqiang Liang & Bruce A. Linquist & Kees Jan van Groenigen & Juhwan Lee & Mark E. Lundy & Natasja van Gestel & Johan Six & Rodney T. Venterea & Chris van Kessel, 2015. "Productivity limits and potentials of the principles of conservation agriculture," Nature, Nature, vol. 517(7534), pages 365-368, January.
    25. Alvarez, Sergio & Larkin, Sherry L. & Ropicki, Andrew, 2017. "Optimizing provision of ecosystem services using modern portfolio theory," Ecosystem Services, Elsevier, vol. 27(PA), pages 25-37.
    26. W. Neil Adger & Jon Barnett & Katrina Brown & Nadine Marshall & Karen O'Brien, 2013. "Cultural dimensions of climate change impacts and adaptation," Nature Climate Change, Nature, vol. 3(2), pages 112-117, February.
    27. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alvarez, Sergio & Larkin, Sherry L. & Ropicki, Andrew, 2017. "Optimizing provision of ecosystem services using modern portfolio theory," Ecosystem Services, Elsevier, vol. 27(PA), pages 25-37.
    2. Vinent, Orencio Duran & Johnston, Robert J. & Kirwan, Matthew L. & Leroux, Anke D. & Martin, Vance L., 2019. "Coastal dynamics and adaptation to uncertain sea level rise: Optimal portfolios for salt marsh migration," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    3. Frederick Ploeg, 2021. "Carbon pricing under uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1122-1142, October.
    4. Freeman, Mark C. & Groom, Ben, 2016. "How certain are we about the certainty-equivalent long term social discount rate?," Journal of Environmental Economics and Management, Elsevier, vol. 79(C), pages 152-168.
    5. Carmona, Itsaso & Ansuategi, Alberto & Chamorro, José Manuel & Escapa, Marta & Gallastegui, María Carmen & Murillas, Arantza & Prellezo, Raúl, 2020. "Measuring the value of ecosystem-based fishery management using financial portfolio theory," Ecological Economics, Elsevier, vol. 169(C).
    6. Marshall Burke & Melanie Craxton & Charles D. Kolstad & Chikara Onda, 2016. "Some Research Challenges In The Economics Of Climate Change," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-14, May.
    7. Dragicevic, Arnaud Z., 2019. "Rethinking the forestry in the Aquitaine massif through portfolio management," Forest Policy and Economics, Elsevier, vol. 109(C).
    8. Dittrich, Ruth & Wreford, Anita & Moran, Dominic, 2016. "A survey of decision-making approaches for climate change adaptation: Are robust methods the way forward?," Ecological Economics, Elsevier, vol. 122(C), pages 79-89.
    9. Peter Michaelis & Heiko Wirths, 2020. "DICE-RD: an implementation of rate-related damages in the DICE model," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 22(4), pages 555-584, October.
    10. David Anthoff & Richard S. J. Tol, 2022. "Testing the Dismal Theorem," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(5), pages 885-920.
    11. Busby, Gwenlyn M. & Binkley, Clark S. & Chudy, Rafal P., 2020. "Constructing optimal global timberland investment portfolios," Forest Policy and Economics, Elsevier, vol. 111(C).
    12. Richard D. Horan & Eli P. Fenichel & David Finnoff & Carson Reeling, 2018. "A Portfolio-Balancing Approach to Natural Capital and Liabilities: Managing Livestock and Wildlife Diseases with Cross-Species Transmission," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 70(3), pages 673-689, July.
    13. Knoke, Thomas & Paul, Carola & Härtl, Fabian & Castro, Luz Maria & Calvas, Baltazar & Hildebrandt, Patrick, 2015. "Optimizing agricultural land-use portfolios with scarce data—A non-stochastic model," Ecological Economics, Elsevier, vol. 120(C), pages 250-259.
    14. Richard S.J. Tol, 2018. "The impact of climate change and the social cost of carbon," Working Paper Series 1318, Department of Economics, University of Sussex Business School.
    15. Sierra-Altamiranda, Alvaro & Charkhgard, Hadi & Eaton, Mitchell & Martin, Julien & Yurek, Simeon & Udell, Bradley J., 2020. "Spatial conservation planning under uncertainty using modern portfolio theory and Nash bargaining solution," Ecological Modelling, Elsevier, vol. 423(C).
    16. Quaas, Martin F. & Quaas, Johannes & Rickels, Wilfried & Boucher, Olivier, 2017. "Are there reasons against open-ended research into solar radiation management? A model of intergenerational decision-making under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 1-17.
    17. Thomas Buchholz & John Gunn & Bruce Springsteen & Gregg Marland & Max Moritz & David Saah, 2022. "Probability-based accounting for carbon in forests to consider wildfire and other stochastic events: synchronizing science, policy, and carbon offsets," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 27(1), pages 1-21, January.
    18. Michel Beine & Ilan Noy & Christopher Parsons, 2021. "Climate change, migration and voice," Climatic Change, Springer, vol. 167(1), pages 1-27, July.
    19. Hänsel, Martin C. & Quaas, Martin F., 2018. "Intertemporal Distribution, Sufficiency, and the Social Cost of Carbon," Ecological Economics, Elsevier, vol. 146(C), pages 520-535.
    20. Gregory Casey & Stephie Fried & Ethan Goode, 2023. "Projecting the Impact of Rising Temperatures: The Role of Macroeconomic Dynamics," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(3), pages 688-718, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolec:v:200:y:2022:i:c:s0921800922001902. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolecon .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.