Modern decision-support tools for optimal adaptation to uncertain climate change
Optimal adaptation to uncertain climate change, Journal of Economic Dynamics and Control, Volume 151, 2023.
Adapting to climate change will require substantial investment of public funds over the coming decades, creating enormous potential for inefficient decisions involving the timing, scale, and location of investment. Modern decision-support tools can potentially improve the efficiency of this investment. In particular, typical climate-change adaptation projects have the characteristics needed for real options analysis to be important: future benefits are uncertain; reversing investment is costly, if it is possible at all; and decisions can be spread over time as uncertainty is resolved. This paper presents a new real options framework for analysing investment decisions related to climate-change adaptation and demonstrates its application using the example of a decision-maker tasked with upgrading an urban stormwater system.