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Water Resources Planning under Climate Change: A “Real Options†Application to Investment Planning in the Blue Nile

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  • Jeuland, Marc
  • Whittington, Dale

Abstract

This article develops a “real options†approach for planning new water resources infrastructure investments and their operating strategies in a world of climate change uncertainty. The approach is illustrated with an example: investments in large new multipurpose dam alternatives along the Blue Nile in Ethiopia. The approach incorporates flexibility in design and operating decisions – the selection, sizing, and sequencing of new dams, and reservoir operating rules. The analysis relies on a simulation model that includes linkages between climate change and system hydrology, and tests the sensitivity of the economic outcomes of investments in new dams to climate change and other uncertainties. Not surprisingly, the results for the Blue Nile basin show that there is no single investment plan that performs best across a range of plausible future climate conditions. The value of the real options framework is that it can be used to identify dam configurations that are both robust to poor outcomes and sufficiently flexible to capture high upside benefits if favorable future climate and hydrological conditions arise. The real options approach could be extended to explore design and operating features of development and adaptation projects other than dams.

Suggested Citation

  • Jeuland, Marc & Whittington, Dale, 2013. "Water Resources Planning under Climate Change: A “Real Options†Application to Investment Planning in the Blue Nile," RFF Working Paper Series dp-13-05-efd, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-13-05-efd
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    File URL: http://www.rff.org/RFF/documents/EfD-DP-13-05.pdf
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    References listed on IDEAS

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    1. Perry, C. J., 1996. "Alternative approaches to cost sharing for water service to agriculture in Egypt," IWMI Research Reports H 18207, International Water Management Institute.
    2. Molden, D., 1997. "Accounting for water use and productivity," IWMI Books, Reports H021374, International Water Management Institute.
    3. Perry, Christopher J., 1996. "Alternative approaches to cost sharing for water service to agriculture in Egypt," IWMI Research Reports 52729, International Water Management Institute.
    4. Molden, David J., 1997. "Accounting for water use and productivity," IWMI Books, International Water Management Institute, number 113623.
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    Cited by:

    1. Young Ryu & Young-Oh Kim & Seung Beom Seo & Il Won Seo, 2018. "Application of real option analysis for planning under climate change uncertainty: a case study for evaluation of flood mitigation plans in Korea," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 23(6), pages 803-819, August.
    2. Paul Watkiss & Alistair Hunt & William Blyth & Jillian Dyszynski, 2015. "The use of new economic decision support tools for adaptation assessment: A review of methods and applications, towards guidance on applicability," Climatic Change, Springer, vol. 132(3), pages 401-416, October.
    3. 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.

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    More about this item

    Keywords

    ile Basin; real options; dams; climate adaptation; cost-benefit analysis; Ethiopia; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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