CEIS - CENTRE FOR ECONOMICS AND INTERNATIONAL STUDIES

TERMS OF REFERENCE

Application of Real Option Methodologies for adaptation planning to sea level rise and related impacts on the coastal zones of Campeche

A World Bank - CEIS (University of Rome “Tor Vergata” ) joint research project

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Background

There is robust scientific evidence that sea level is increasing. According to IPCC’s Fourth Assessment Report, mean sea level has risen at an average of 3.1 ± 0.7 mm per year over the period 1993-2003. Scientific analysis indicates that the projected sea level rise may exceed 1 m and possibly reach 2 m during the current century. There is also growing consensus on the likelihood of increased weather extremes including storm surges.

The projected rise in sea level is likely to increase the vulnerability of coastal zones in the Gulf of Mexico, which are already under pressure from a combination of anthropogenic activities and natural processes. Phenomena such as coastal erosion, increased floods, saline intrusion, lost of land, intensified storms all threat human settlements, important assets and infrastructure along the coast, also threatening the role of low-lying areas in terms of coastal protection and buffering of storms, critical habitats for migratory birds, nesting areas for sea turtles, amphibians and mangroves, substrates for coral reefs and associated fisheries, and tourist attraction.

The State of Campeche, in the Mexican Yucatán Peninsula, has 404 km of coastline, and is currently suffering the effects of sea level rise and higher storm surges. The State has important infrastructure in the coastline, such as a PEMEX refinery, close to Ciudad del Carmen, a coastal city which is one of the largest of the State.

The World Bank and the Government of Campeche have agreed to jointly carry out a Strategic Environmental Assessment (SEA) for the State of Campeche. The objective of such a SEA is to analyze the sea level rise impacts from a holistic perspective, gaining a deeper understanding of the expected effects, and devising a strategy to adapt to those impacts on a participatory and consultative manner. A deeper understanding of the adaptation alternatives, with their associated costs, benefits and option values, under an uncertain scenario, is key to better inform the policy making process.

Highlights of the Real Option Methodology

Real option theory implies that an adaptation project should be seen as vehicle of a broader adaptation policy. It should thus be evaluated in terms of the options created and destroyed for its stakeholders.
Real options arise when substantial sunk costs are incurred in the presence of uncertainty. Thus, adaptation options require some measure of irreversibility to materialize: i.e. that specific, non recoverable costs are undergone with and/or without the project in order to obtain capabilities that would not be available otherwise.
But what are these options? Two distinct sets of options can be usefully identified. The first set consists in the options created because the project enhances the capability to adapt to climate changes of some of its stakeholders and this capability increase is replicable and can be expected to diffuse over a wider class of perspective beneficiaries.
The second set consists in the options that would be destroyed without the project because its stakeholders would suffer some of the consequences of climate change with insufficient or even perverse adaptation. For example, climate change may accentuate the weather patterns and increase the probability of extreme events such as droughts or floods. Failure to act by using storage, water management and building appropriate defenses against floods may irreversibly compromise the capability of a given environment to recover from adverse meteorological events and may precipitate a series of irreversible changes.

Objective of the study

The objective of the study is to apply the Real Option methodology to the State of Campeche, selecting a number of strategic options for the State and analyzing their cost, benefits and option values, in order to better inform the decision making process.

The project will aim to:

• Liaise with local institutions, including national and international when appropriate, to learn from past and current initiatives, identifying relevant work done and the existing gaps.
• Based upon (the municipal or state) development plans and strategies, ecological zoning and planned infrastructure, identify the choice of options for use for the Real Option methodology.
• Liaise and closely coordinate with the technical staff working on the Strategic Environmental Assessment on the impacts of sea level rise jointly executed by the World Bank and the State. To the extent possible, coordinate interviews and consultation processes, taking advantage of the SEA workshops to identify adaptation options, and explore synergies between the SEA and the Real Option studies.
• Whenever appropriate, liaise with State universities to create capacity and promote local ownership of the results.
• Utilizing the results of the SEA as input for the identification of current problems that Ciudad del Carmen faces in relation to sea level rise, storms and storm surges and erosion, and SEA’s assessment on future impacts of climate change on those problems, perform a Real Option analysis on a number of possible adaptation options to the existing and forecasted vulnerabilities (using information from part b) above if relevant).