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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," Environmental Economics Research Hub Research Reports 1075, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:eenhrr:1075
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    File URL: https://crawford.anu.edu.au/research_units/eerh/pdf/EERH_RR75.pdf
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    References listed on IDEAS

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    1. Viggo Nordvik & Kim Robert Lisø, 2004. "A primer on the building economics of climate change," Construction Management and Economics, Taylor & Francis Journals, vol. 22(7), pages 765-775.
    2. Anda, Jon & Golub, Alexander & Strukova, Elena, 2009. "Economics of climate change under uncertainty: Benefits of flexibility," Energy Policy, Elsevier, vol. 37(4), pages 1345-1355, April.
    3. Lambie, Neil Ross, 2010. "Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(2), June.
    4. Dobes, Leo, 2009. "Adapting More Cleverly To Climate Change By Using ‘Real Options’ To Address The Uncertainties," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47615, Australian Agricultural and Resource Economics Society.
    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, June.
    6. Robert Repetto & Robert Easton, 2009. "Climate Change and Damage from Extreme Weather Events," Working Papers wp207, Political Economy Research Institute, University of Massachusetts at Amherst.
    7. Leo Dobes, 2008. "Getting Real about Adapting to Climate Change: Using ‘Real Options’ to Address the Uncertainties," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 15(3), pages 55-72.
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    Cited by:

    1. 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.
    2. repec:wsi:ccexxx:v:03:y:2012:i:02:n:s201000781250008x is not listed on IDEAS
    3. 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).
    4. Dobes, Leo, 2012. "Adaptation to Climate Change: Formulating Policy under Uncertainty," Working Papers 249390, Australian National University, Centre for Climate Economics & Policy.
    5. 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).
    6. 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.

    More about this item

    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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