Real Options Analysis of Adaptation to Changing Flood Risk: Structural and Nonstructural Measures

Real options analysis provides a means of appraising the benefits of introducing or preserving flexibility in flood risk-management decisions. Building in optionality can help to create flood risk-management strategies that are robust to a range of possible future conditions. Real options analysis has therefore been attracting increasing attention as an approach to climate change-adaptation decision making, and in particular for adapting flood-protection infrastructure to the uncertain impacts of climate change. Here, a methodology is presented for analyzing real options in flood risk management, which considers the joint effects of uncertainties in socioeconomic drivers of floodplain vulnerability as well as the uncertain effects of climate change on future flood frequency. Decision makers at future time steps in the sequential decision problem are taken to be rational optimizers who benefit from improved information about these two uncertain factors, compared with the present day. The sensitivity of two archetypical flood risk-management decisions to uncertainty, both in future river flows and to socioeconomic change, is demonstrated. In the first, a flood protection dike can be built with a widened base, providing the option to heighten it at a later date, or it can be built to a fixed height with no further options apart from costly reconstruction. In the second problem, a portion of undeveloped, flood-prone land separates an existing development from the river. A decision can be made to purchase the land and forgo development. A real options analysis is used to identify the circumstances in which it is cost beneficial to purchase the land, which depends on the value of existing assets exposed to flooding and how that value would change were development to take place. (C) 2017 American Society of Civil Engineers.