Valuation of Drainage Infrastructure Improvement Under Climate Change Using Real Options

Park, Taeil; Kim, Changyoon; Kim, Hyoungkwan

doi:10.1007/s11269-013-0492-z

Cited by 24 publications

(14 citation statements)

References 21 publications

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“…As indicated by this is because the higher operational flexibility implicitly provided by these options is valuable. This additional value may, as shown by Park et al (2014), make it worth investing in projects that would not have been undertaken using the NPV criterion.…”

Section: Real-options Analysis Of Investment In Climate Change Adaptamentioning

confidence: 99%

“…Some of the studies on flood risk control focused on other types of uncertainty and did not explicitly consider climate uncertainty. Park et al ( 2014 ), Kim et al ( 2018 ) and Liu et al ( 2018 ) emphasized the importance of market uncertainty and temporal flexibility when timing investments in flood control. They used binomial lattices, decision trees and Monte Carlo simulations as solution methods.…”

Section: Real-options Analysis Of Investment In Climate Change Adaptamentioning

confidence: 99%

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Investing in climate change adaptation and mitigation: A methodological review of real-options studies

Ginbo

Corato

Hoffmann

2020

Ambio

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Uncertain future payoffs and irreversible costs characterize investment in climate change adaptation and mitigation. Under these conditions, it is relevant to analyze investment decisions in a real options framework, as this approach takes into account the economic value associated with investment time flexibility. In this paper, we provide an overview of the literature adopting a real option approach to analyze investment in climate change adaptation and mitigation, and examine how the uncertain impacts of climate change on the condition of the human environment, risk preferences, and strategic interactions among decisions-makers have been modeled. We found that the complex nature of uncertainties associated with climate change is typically only partially taken into account and that the analysis is usually limited to decisions taken by individual risk neutral profit maximizers. Our findings call for further research to fill the identified gaps.

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Section: Real-options Analysis Of Investment In Climate Change Adaptamentioning

confidence: 99%

Section: Real-options Analysis Of Investment In Climate Change Adaptamentioning

confidence: 99%

Investing in climate change adaptation and mitigation: A methodological review of real-options studies

Ginbo

Corato

Hoffmann

2020

Ambio

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“…Lastly, its volatility is estimated from the available observations or climate change scenarios, for example, changes in rainfall intensity over time that lead to flooding. Other examples of variables used to represent the volatility of the project revenues are derived from annual flood damage data in Park, Kim, and Kim (), probabilistic sea level rise scenarios in Abadie, Galarraga, and de Murieta (), and minimum and maximum annual flood frequency values computed among climate projections (Ryu, Kim, Seo, & Seo, ).…”

Section: Real Options Analysis: Origins Approaches and Applicationsmentioning

confidence: 99%

The added value of real options analysis for climate change adaptation

Wreford

Dittrich

Pol

2020

WIREs Climate Change

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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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“…Therefore, the first step in the financial analysis of climate disaster response strategies is to accurately assess the damage caused by disasters. Park et al (2014) predicted the future damage of flood disasters by using a regression analysis of historical hazard data. However, the annual losses of flood disasters are highly random, and a simple linear regression model cannot fully describe the interannual differences in the economic losses.…”

Section: Literature Reviewmentioning

confidence: 99%

“…A cost-benefit analysis (CBA) would evaluate project value by comparing the total revenue and cost, allowing a comparison of costs and benefits in a common monetary metric, which is suitable for the economic evaluation of public utilities. CBA can be used to evaluate the social benefit of specific disaster-response facilities (Gonzalez et al 2017, Kind et al 2017) and the losses caused by nature disasters (Haer et al 2017, van der Pol et al 2017). However, it is difficult to monetize all the factors related to the proposed project-especially some elements in non-market sectors.…”

Section: Introductionmentioning

confidence: 99%

A Real Options‐Based Decision‐Making Model for Infrastructure Investment to Prevent Rainstorm Disasters

Wang

Liu

Zhang

et al. 2019

Production and Operations Management

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Extreme precipitation caused by global climate change is expected to have a severe impact on urbanized areas. While decision‐makers struggle with climate uncertainty, an effective infrastructure adaptation strategy attaches great importance to preventing disasters resulting from rainfall. We propose a decision‐making model to incorporate the probability of rainfall disasters and recommend investing time when evaluating projects related to climate adaptation. We use a hydrological statistical model and economic and technical factors to estimate the expected economic losses in several rainfall disaster scenarios, and the value of the adaptation infrastructures is calculated using a real options pricing approach. Then the decision‐making model is applied to a case study involving a campus rainfall disaster prevention facility at the Central University of Finance and Economics in Beijing, China. We established three submerged scenarios with different rainfall intensities, then we evaluated the premium of holding an option to defer and pointed out the optimal investing time in each scenario. This model is expected to provide guidance for the development of adaptation infrastructure for relatively small areas such as communities and universities. And we proved that using real options‐based approach could provide more managerial flexibility for investors.

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Valuation of Drainage Infrastructure Improvement Under Climate Change Using Real Options

Cited by 24 publications

References 21 publications

Investing in climate change adaptation and mitigation: A methodological review of real-options studies

Investing in climate change adaptation and mitigation: A methodological review of real-options studies

The added value of real options analysis for climate change adaptation

A Real Options‐Based Decision‐Making Model for Infrastructure Investment to Prevent Rainstorm Disasters

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