The added value of real options analysis for climate change adaptation

WIREs Climate Change (2020)

https://onlinelibrary.wiley.com/doi/abs/10.1002/wcc.642

Climate change adaptation investment decisions can be made more efficiently if uncertainty and new information are considered in their economic appraisal.

Real options analysis (ROA) is a robust decision‐making tool that allows for the incorporation of both uncertainty and new information.

We highlight the differences between traditional risk‐based ROA, and scenario‐based ROA, and compare these approaches based on their assumptions and use of climate information.

Given the large climate uncertainties for long‐term adaptation planning, we suggest that an emerging strand of scenario‐based ROA methods offers ways to help identify and conditionally value flexibility without aggregating values into precise expected values across the world.