Adaptation decision are decisions under high uncertainty about climate change.

But what does Cost-Benefit Analysis tell us about economic efficiency in period 1, given current uncertainty about climate change?

Real Options Analysis allows for the possibility of an economic investment decision being delayed to account for learning over time

Alternatively, Real Options Analysis allows for the benefits of flexibility in the nature of the investment to be realized

Various influences:

  • Discounting will have effect on delayed benefits & costs (of adaptation & residual damage) and net balance
  • Lifetime of the adaptation option likely to determine extent of uncertainties
  • Technical change and preferences may lead to up-dating of benefits and costs
  • Characterisation of risk through use of probabilities

Two simple examples of Real Options Analysis are set out in the excel document.