The added value of real options analysis for climate change adaptation

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.

The online version of the paper “The added value of real options analysis for climate change adaptation” is accessible here