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Notes on Applying 'Real Options' to Climate Change Adaptation Measures, with Examples from Vietnam

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  • Leo Dobes

    (Crawford School of Public Policy, The Australian National University)

Abstract

A factor common to all adaptation measures is the uncertainty that is the hallmark of climate change. The timing, intensity and location of climate change impacts is not known to any degree of precision. Because most deterministic analyses and policy prescriptions ignore this uncertainty, their recommendations are likely to waste community resources. Except by chance, adaptation measures will either be over-engineered, or they will be inadequate and result in harm. Applying real options thinking allows an incremental and flexible approach. Adaptation measures are implemented only as better knowledge becomes available over time. Several examples are given of real options in the Mekong Delta, with a comparison of net present values of two housing alternatives. It is essential to undertake net present value calculations when comparing different projects to ensure that the value of any options is weighed against other costs and benefits.

Suggested Citation

  • Leo Dobes, 2010. "Notes on Applying 'Real Options' to Climate Change Adaptation Measures, with Examples from Vietnam," CCEP Working Papers 0710, Centre for Climate & Energy Policy, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:ccepwp:0710
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    References listed on IDEAS

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    Cited by:

    1. Myung-Jin Kim & Robert J. Nicholls & John M. Preston & Gustavo A. Almeida, 2022. "Evaluation of flexibility in adaptation projects for climate change," Climatic Change, Springer, vol. 171(1), pages 1-17, March.
    2. Dobes Leo & Jotzo Frank & Stern David I., 2014. "The Economics of Global Climate Change: A Historical Literature Review," Review of Economics, De Gruyter, vol. 65(3), pages 281-320, December.
    3. Dobes, Leo, 2012. "Adaptation to Climate Change: Formulating Policy under Uncertainty," Working Papers 249390, Australian National University, Centre for Climate Economics & Policy.
    4. Paul Watkiss, 2015. "A review of the economics of adaptation and climate-resilient development," GRI Working Papers 205, Grantham Research Institute on Climate Change and the Environment.
    5. Peter Linquiti & Nicholas Vonortas, 2012. "The Value Of Flexibility In Adapting To Climate Change: A Real Options Analysis Of Investments In Coastal Defense," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-33.
    6. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Fundamental questions on the economics of climate adaptation: Outlines of a new research programme," UFZ Reports 05/2012, Helmholtz Centre for Environmental Research (UFZ).
    7. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Ökonomische Grundfragen der Klimaanpassung: Umrisse eines neuen Forschungsprogramms," UFZ Reports 02/2012, Helmholtz Centre for Environmental Research (UFZ).

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    More about this item

    Keywords

    real options; Vietnam; climate change; adaptation;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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