Journal
WILEY INTERDISCIPLINARY REVIEWS-CLIMATE CHANGE
Volume 11, Issue 3, Pages -Publisher
WILEY
DOI: 10.1002/wcc.642
Keywords
adaptation; climate change; decision-making; real options analysis; uncertainty
Funding
- New Zealand Deep South National Science Challenge
- grant SEASCAPE from the Deutsche Forschungsgemeinschaft (DFG) as part of the Special Priority Program (SPP) [1889]
- project INSeaPTION as part of ERA4CS
- ERA-NET initiated by JPI Climate
- BMBF
- MINECO
- NWO
- ANR
- European Union
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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. In this opinion article, we argue that ROA is a valuable tool, providing the analysis is designed to reflect the real-world characteristics of the decision context. We highlight the differences between traditional risk-based ROA, and scenario-based ROA, and discuss the relative merits of the approaches from the perspective of their assumptions and use of climate information. We also emphasize the need for increased co-development of ROA design and applications with end-users. 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 states of the world. This article is categorized under: Climate Economics > Iterative Risk-Management Policy Portfolios
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