Real Options in flood risk management decision making

Woodward, M., Gouldby, B., Kapelan, Z., Khu, S. T. and Townend, I. (2011) Real Options in flood risk management decision making. Journal of Flood Risk Management, 4 (4), 339-349. (doi:10.1111/j.1753-318X.2011.01119.x).

Abstract

Effective flood risk management involves the quantification of flood risk and the implementation of cost-effective, sustainable, and environmentally and socially acceptable measures that reduce flood risk. However, making decisions on the most appropriate long-term intervention investments can be challenging; this is primarily because of the uncertainties associated with future climate change and socioeconomic development. Real Options analysis is a widely recognised approach for encouraging appropriate climate change adaptation and mitigation investment decisions. To date, however, there has only been limited use of Real Options Analysis Techniques within the Flood and Coastal Erosion Risk Management community. In this paper, a methodology is described that has the capability to assess the most appropriate set of interventions to make in a flood system, given the future uncertainties. The methodology captures the concepts of Real Options and has the capability to value the flexibility associated with potential flood risk management intervention options across a range of future climate change and socioeconomic scenarios. The novel Real Options approach has been tested and verified on a real-life case study situated in the Thamesmead area of the Thames Estuary. The results obtained demonstrate the potential for substantial cost savings under future uncertainties when Real Options are used instead of more traditional, precautionary approaches.

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Contributors

Author: I. Townend

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