Optimal dynamic climate adaptation pathways: a case study of New York City

Chi Truong, Matteo Malavasi, Han Li, Stefan Trueck and Pavel V. Shevchenko
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Chi Truong: Department of Actuarial Studies and Business Analytics, Macquarie Business School, Macquarie University
Matteo Malavasi: School of Risk and Actuarial Studies, UNSW Business School, UNSW
Han Li: Department of Economics, University of Melbourne
Stefan Trueck: Department of Actuarial Studies and Business Analytics, Macquarie Business School, Macquarie University
Pavel V. Shevchenko: Department of Actuarial Studies and Business Analytics, Macquarie Business School, Macquarie University

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Abstract: Assessing climate risk and its potential impacts on our cities and economies is of fundamental importance. Extreme weather events, such as hurricanes, floods, and storm surges can lead to catastrophic damages. We propose a flexible approach based on real options analysis and extreme value theory, which enables the selection of optimal adaptation pathways for a portfolio of climate adaptation projects. We model the severity of extreme sea level events using the block maxima approach from extreme value theory, and then develop a real options framework, factoring in climate change, sea level rise uncertainty, and the growth in asset exposure. We then apply the proposed framework to a real-world problem, considering sea level data as well as different adaptation investment options for New York City. Our research can assist governments and policy makers in taking informed decisions about optimal adaptation pathways and more specifically about reducing flood and storm surge risk in a dynamic settings.

Date: 2024-02
New Economics Papers: this item is included in nep-env
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