Cost Benefit Analysis and Economic Justification
Cost-Benefit Analysis (CBA) in the development of a GCF Concept Note is a systematic approach used to evaluate and compare the economic costs and benefits of a proposed climate project. It helps determine whether the project is economically viable, efficient, and worthy of investment from the GCF. In GCF Concept Note development, CBA refers to the process of quantifying and comparing the financial, environmental, and social costs of the proposed project with its expected benefits, such as:
- Reduced greenhouse gas (GHG) emissions (for mitigation projects),
- Increased resilience to climate impacts (for adaptation projects),
- Socio-economic co-benefits (e.g., jobs, health, food security).
The integration of CBA in a GCF Concept Note is a critical component that strengthens the proposal's credibility, transparency, and strategic alignment with GCF’s investment criteria. CBA helps prove that the proposed project provides good value for the financial resources requested. The tool should show that the benefits of the project outweigh its costs, which is essential for justifying GCF funding. GCF has to make decisions across many competing proposals. A clear CBA supports decision-makers in evaluating the efficiency of the intervention, the economic feasibility, and the potential return on investment (including social, environmental, and climate benefits).
CBA supports multiple GCF investment criteria, including Impact potential (e.g., emission reductions), Paradigm shift potential (e.g., sustainable systemic changes), Sustainable development potential (e.g., co-benefits for health, livelihoods), Needs of the recipient, and Efficiency and effectiveness. CBA strengthens the climate rationale by comparing the climate-related costs (adaptation/mitigation) to the benefits. It helps quantify avoided damages from climate impacts, cost savings from low-emission technologies, and increased resilience benefits for vulnerable populations. CBA pushes project developers to use data and modeling tools to estimate costs (capital, operational, maintenance), quantify direct and indirect benefits, identify trade-offs and risks which in turn leads to more robust and defensible project design.
An integrated CBA promotes transparency for stakeholders (including GCF, national authorities, and civil society), as it lays out the assumptions and methods used, the distribution of costs and benefits across different groups, potential externalities or unintended effects. CBA also supports GCF Sectoral Guides1 and GCF Strategic Plan 2024 – 20272, which has been prioritized in the new GCF Concept Note format. GCF does not mandate a full, detailed CBA at the Concept Note stage. However, it is strongly encouraged. A summary of the expected cost-effectiveness and impact potential is typically sufficient at this early phase. However, a detailed CBA will be required in the full Funding Proposal stage.
Cost Benefit Analysis Development
CBA for a GCF Concept Note is a key input for Section D.4: Justification of GCF funding request of the Concept Note and becomes even more important in the Funding Proposal stage.
Main Components of a Cost Benefit Analysis
The main components of a Cost Benefit is elaborated in the table below, which includes Project Costs, Project Benefits
| Component | Description |
|---|---|
| Project Costs | Capital costs, operating and maintenance costs, administrative costs. |
| Project Benefits | Quantifiable outcomes like emissions reductions, avoided losses and damages from climate events, increased productivity, improved health, etc. |
| Time Horizon | Usually includes a long-term view (e.g., 20–30 years) to capture all lifecycle impacts |
| Discount Rate | Future costs and benefits are adjusted to present values to compare accurately |
| Sensitivity Analysis | Evaluates how results change under different assumptions |
A simple example of a proposed renewable energy project in a developing country can show:
- Costs: $20 million (including installation, operation, and maintenance)
- Benefits: $35 million (in saved fossil fuel imports, GHG reduction value, and improved air quality)
- Result: Net benefit of $15 million → demonstrating strong cost-effectiveness.
Guide to Develop a Cost Benefit Analysis
The CBA section in a GCF Concept Note is usually summarized rather than fully detailed, as the full economic and financial analysis is typically required at the Funding Proposal stage. However, including a concise and structured summary of the expected costs and benefits significantly strengthens your Concept Note. The following suggested format can be used for presenting CBA in GCF Concept Note development. It is important to pay attention to the length of CBA. To keep it concise, ideally write it to 1 page or less. Use conservative assumptions and cite sources or models, when applicable. If full CBA is not yet complete, indicate that detailed economic and financial analysis will be presented in the Funding Proposal stage.
Project Overview
Title: [Project Name]
Country: [Country Name]
Sector(s): [Mitigation / Adaptation / Cross-cutting]
Objective: [Brief description of the climate-related goal]
Summary of Costs
The cost summary of the proposed project is presented in the table below.
| Cost Category | Estimated Value (USD) | Description |
|---|---|---|
| Capital (CAPEX) | X,XXX,XXX | Infrastructure, equipment, installation |
| Operational (OPEX) | X,XXX,XXX | Annual maintenance and operations |
| Capacity building & training | XXX,XXX | Training, workshops, technical assistance |
| Monitoring & Evaluation | XXX,XXX | Tools, reporting, impact tracking |
| Total Estimated Cost | XX,XXX,XXX |
Summary of Benefits
The benefit summary of the proposed project is presented in the table below.
| Benefit Category | Quantified Benefit (USD or Units) | Description |
|---|---|---|
| GHG emissions reduction | X,XXX,XXX tCO2e | Over 20 years, based on renewable energy or efficiency gains |
| Avoided climate-related losses | $X million | E.g., flood damages, crop loss avoided due to adaptation |
| Improved livelihoods / income | $X million | E.g., through job creation or increased productivity |
| Health / social co-benefits | Qualitative and/or $ estimate | E.g., reduced air pollution, improved water access |
| Total Estimated Benefit | XX,XXX,XXX | Summed if possible |
Economic Viability
The economic viability is demonstrated using several CBA metrics below:
- Net Present Value (NPV): $[If estimated]
- Benefit-Cost Ratio (BCR): [e.g., 2.1:1]
- Internal Rate of Return (IRR): [% optional]
- Discount Rate Used: [e.g., 6%]
- Time Horizon: [e.g., 20 years]
Sensitivity Analysis
When available and possible, include a discussion on how the CBA outcomes change with variations in key assumptions (e.g., energy prices, discount rate, project lifespan) through a sensitivity analysis. Detail on how to present sensitivity analysis is provided in the case study in the next section.
Narrative Summary
It is important to summarize the expected delivery with a cost benefit ratio in a form of a statement. For example:
“The project is expected to deliver a total of approximately $45 million in quantifiable benefits over 20 years, compared to total estimated costs of $20 million, yielding a cost-benefit ratio of 2.25. This demonstrates strong value for money, particularly in reducing GHG emissions, increasing climate resilience of rural communities, and improving socio-economic outcomes. The analysis confirms that the intervention is economically sound and aligns with GCF’s efficiency and effectiveness investment criteria."
| Cost Component | Amount (USD) | Time Period | Description |
|---|---|---|---|
| Capital Expenditure (CAPEX) | Y1–Y2 | Infrastructure, equipment, initial setup | |
| Operating Expenditure (OPEX) | Y3–Y20 | Maintenance, staff, recurring costs | |
| Capacity Building & Training | Y1–Y5 | Training, community engagement, technical support | |
| Monitoring & Evaluation (M&E) | Y1–Y20 | Baseline, data systems, impact tracking | |
| Project Management & Admin | Y1–Y20 | Coordination, logistics, salaries | |
| Contingency / Risk Buffer | Y1–Y20 | For inflation, shocks, unexpected needs | |
| Total Project Cost | $ |
| Benefit Category | Estimated Benefit | Unit / Value | Time Horizon | Valuation Method | Description/ Assumptions | Benefit Category | Estimated Benefit |
|---|---|---|---|---|---|---|---|
| GHG Emissions Reduction | XX,XXX tCO2e | $X/tCO2e | 20 years | Social Cost of Carbon or carbon market value | Based on renewable energy or energy efficiency projections | GHG Emissions Reduction | XX,XXX tCO2e |
| Avoided Climate Losses | $X million | Monetary | 20 years | Historical data, modeling | Flood protection, reduced crop loss, fewer disasters | Avoided Climate Losses | $X million |
| Health Benefits | $X or Qualitative | DALYs or $ | 20 years | WHO or national health data | Reduced respiratory illnesses, waterborne disease | Health Benefits | $X or Qualitative |
| Increased Income / Productivity | $X | $/household/year | 15–20 years | Surveys or benchmarks | From new jobs, better yields, value chains | Increased Income / Productivity | $X |
| Time Savings | $X (optional) |
Hours/year | 20 years | Valued via wage proxies | E.g., improved access to water or markets | Time Savings | $X (optional) |
| Ecosystem Services (if any) | $X or qualitative | 20 years | Proxy values or avoided cost | Forest preservation, biodiversity, erosion control | Ecosystem Services (if any) | $X or qualitative | |
| Total Estimated Benefit | $ | Total Estimated Benefit | $ |
