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

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.