Application of real option analysis for planning under climate change uncertainty: a case study for evaluation of flood mitigation plans in Korea

Young Ryu, Young-Oh Kim, Seung Beom Seo () and Il Won Seo
Additional contact information
Young Ryu: National Institute of Meteorological Sciences
Young-Oh Kim: Seoul National University
Seung Beom Seo: Seoul National University
Il Won Seo: Seoul National University

Mitigation and Adaptation Strategies for Global Change, 2018, vol. 23, issue 6, No 1, 803-819

Abstract: Abstract With concerns regarding global climate change increasing, recent studies on adapting to nonstationary climate change recommended a different planning strategy that could spread risks. Uncertainty in global climate change should be considered in any decision-making processes for flood mitigation strategies, especially in areas within a monsoon climate regime. This study applied a novel planning method called real option analysis (ROA) to an important water resources planning practice in Korea. The proposed method can easily be applied to other watersheds that are threatened by flood risk under climate change. ROA offers flexibility for decision-makers to reflect uncertainty at every stage during the project planning period. We successfully implemented ROA using a binomial tree model, including two real options—delay and abandon—to evaluate flood mitigation alternatives for the Yeongsan River Basin in Korea. The priority ranking of the four alternatives between the traditional discount cash flow (DCF) and ROA remained the same; however, two alternatives that were assessed as economically infeasible using DCF, were economically feasible using ROA. The binomial decision trees generated in this study are expected to be informative for decision-makers to conceptualize their adaptive planning procedure.

Keywords: Real option analysis; Flood mitigation; Uncertainty; Climate change; Water resources planning (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1007/s11027-017-9760-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:masfgc:v:23:y:2018:i:6:d:10.1007_s11027-017-9760-1

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/11027

DOI: 10.1007/s11027-017-9760-1

Access Statistics for this article

Mitigation and Adaptation Strategies for Global Change is currently edited by Robert Dixon

More articles in Mitigation and Adaptation Strategies for Global Change from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().