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

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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.

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Acknowledgements

This research was supported by a grant (14AWMP-B082564-01) from the Advanced Water Management Research Program funded by the Ministry of Land, Infrastructure, and Transport of Korea, a grant (11 Technology Innovation C05) from the Construction Technology Innovation Program funded by Ministry of Land, Infrastructure and Transport, and a grant (2014001310007) from the Climate Change Correspondence Program funded by the Korea Ministry of Environment. The authors are grateful to the editors and the anonymous reviewers for their insightful comments and helpful suggestions.

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Authors and Affiliations

  1. National Institute of Meteorological Sciences, Jeju-do, South Korea

    Young Ryu

  2. Department of Civil and Environmental Engineering, Seoul National University, Seoul, South Korea

    Young-Oh Kim & Il Won Seo

  3. Institute of Engineering Research, Seoul National University, Seoul, South Korea

    Seung Beom Seo

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  1. Young Ryu
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  2. Young-Oh Kim
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  3. Seung Beom Seo
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  4. Il Won Seo
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Correspondence to Seung Beom Seo.

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Ryu, Y., Kim, YO., Seo, S.B. et al. Application of real option analysis for planning under climate change uncertainty: a case study for evaluation of flood mitigation plans in Korea. Mitig Adapt Strateg Glob Change 23, 803–819 (2018). https://doi.org/10.1007/s11027-017-9760-1

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  • DOI: https://doi.org/10.1007/s11027-017-9760-1

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