Abstract
Infrastructure for water, urban drainage and flood protection has a typical lifetime of 30–200 years and its continuing performance is very sensitive to climate change. Investment decisions for such systems are frequently based on state-of-the-art impact assessments using a specified climate change scenario in order to identify a singular optimal adaptive strategy. In a non-stationary world, however, it is risky and/or uneconomic to plan for just one climate change scenario as an average or best estimate, as is done with the use of the Predict-Then-Adapt method. We argue that responsible adaptation requires an alternative method that effectively allows for the lack of knowledge about future climate change by adopting a managed/adaptive strategy. The managed/adaptive strategy confers the ability, derived from built-in flexibility, to adjust to future uncertainties as they unfold. This will restrict the effect of erroneous decisions and help avoid maladaptation. Real In Options (RIO) analysis can facilitate the development of an optimal managed/adaptive strategy to climate change. Here, we show the economic benefits of adopting a managed/adaptive strategy and building in flexibility, using RIO analysis applied for the first time to urban drainage infrastructure.
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Notes
This has been selected as illustrative and in practice, other approaches to uncertainty may be adopted: for example, assigning a 100 % probability to the most pessimistic climate change scenario (the Wald criterion).
Abbreviations
- GBM:
-
Geometric brownian motion
- PDF:
-
Probability density function
- RIO:
-
Real in options
- RO:
-
Real options
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Gersonius, B., Ashley, R., Pathirana, A. et al. Climate change uncertainty: building flexibility into water and flood risk infrastructure. Climatic Change 116, 411–423 (2013). https://doi.org/10.1007/s10584-012-0494-5
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DOI: https://doi.org/10.1007/s10584-012-0494-5