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
Wreford, A; Dittrich, R; van der Pol, TD
The added value of real options analysis for climate change adaptation
Wiley Interdisciplinary Reviews-Climate Change