Project appraisal under uncertain futures: An assessment of real options analysis and flood management

Abstract

Climate change is a major concern as it is likely to cause significant human and environmental impacts. However, the uncertainty of the magnitude of climate change impedes adaptation. Recent decision-making approaches tend to employ flexible options or strategies that enable us to observe and learn over time and hence make more informed decisions in the future. This thesis focuses on real-options-approaches as an method or tool to assess flexible adaptation options or strategies in the context of coastal flooding and sea-level rise. An integrated framework for real options analysis of climate change adaptation decisions has been developed, considering the key processes for coastal flood risk management.
The resulting methodology has been applied to an illustrative case study site (Lymington, UK south coast), which has a long history of coastal flooding and adaptation, and sea-level rise must be considered in future decisions. However, due to the uncertainty of future sea-level rise and socio-economic change, the scale and/or timing of adaptation measures are a key question in adaptation planning. The different adaptation pathways of upgrading coastal defences in single or multiple stage(s) are assessed within the integrated framework. Flood simulations and monetisation of flood damages are conducted to quantify the performance of the selected adaptation pathways against the risk and uncertainty of coastal flooding due to sea-level rise.
This analysis makes three main contributions. Firstly, we identify a maximum option value and an optimal investment time for an adaptation option under a given environmental condition. Secondly, we find that the timing of optimum investment can be linked to a threshold value of sea-level rise, independent of the rates of the sea-level rise. Thus, it can be used as an indicator of the optimal investment time to achieve the maximum option value by observations. Lastly, this thesis provides a method to compare single stage investments and multiple stage investments in one metric performance. Hence, the application of the integrated framework enables us to understand how to maximise/optimise the performance (i.e. option value) of single adaptation options or pathways with flexibility, allowing uncertain conditions of sea-level rise and socio-economic change.
The analysis complements previous real option analysis in climate change adaptation with a focus on quantification of adaptation options in economy efficiency. The real-options-based approach developed in this thesis can be applied to any case where irreversible adaptation measures are being planned against climate change induced events. This framework helps to understand when and how to implement the adaptation options efficiently, providing sufficient services to protect Lymington under uncertain conditions.

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ORCID for Robert Nicholls: orcid.org/0000-0002-9715-1109

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