Evaluation of flexibility in adaptation projects for climate change

Abstract

Climate change adaptation inherently entails investment decision-making under the high levels of uncertainty. To address this issue, a single fixed large investment can be divided into two or more sequential investments. This reduces the initial investment cost and adds flexibility about the size and timing of subsequent investment decisions. This flexibility enables future investment decisions to be made when further information about the magnitude of climate change becomes available. This paper presents a real option analysis framework to evaluate adaptations including flexibility to reduce both the risk and uncertainty of climate change, against increasing coastal flooding due to sea-level rise as an example. The paper considers (i) how to design the sequence of adaptation options under growing risk of sea-level rise, and (ii) how to make the efficient use of flexibility included in adaptations for addressing uncertainty. A set of flexibilities (i.e. wait or future growth) are incorporated into single-stage investments (i.e. raising coastal defence from 2.5 mAOD to 3.5mAOD or 4.0 mAOD) in stages so that multiple-stage adaptations with different heights are created. The proposed method compares these sequentially growing adaptations in economic terms, including optimisation, providing additional information on the efficiency of flexible adaptation strategies given the uncertainty of climate change. The results from the evaluation enable decision-makers to identify long-lasting robust adaptation against the uncertainty of climate change.