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Review article - Peer-reviewed, 2021

Investing in climate change adaptation and mitigation: A methodological review of real-options studies

Ginbo, Tsegaye; Di Corato, Luca; Hoffmann, Ruben

Abstract

Uncertain future payoffs and irreversible costs characterize investment in climate change adaptation and mitigation. Under these conditions, it is relevant to analyze investment decisions in a real options framework, as this approach takes into account the economic value associated with investment time flexibility. In this paper, we provide an overview of the literature adopting a real option approach to analyze investment in climate change adaptation and mitigation, and examine how the uncertain impacts of climate change on the condition of the human environment, risk preferences, and strategic interactions among decisions-makers have been modeled. We found that the complex nature of uncertainties associated with climate change is typically only partially taken into account and that the analysis is usually limited to decisions taken by individual risk neutral profit maximizers. Our findings call for further research to fill the identified gaps.

Keywords

Climate change adaptation; Climate change mitigation; Real-options; Uncertainty

Published in

AMBIO: A Journal of the Human Environment
2021, Volume: 50, number: 1, pages: 229-241
Publisher: SPRINGER

      SLU Authors

      • Sustainable Development Goals

      SDG13 Climate action

      UKÄ Subject classification

      Economics

      Publication Identifiers

      DOI: https://doi.org/10.1007/s13280-020-01342-8

      Permanent link to this page (URI)

      https://res.slu.se/id/publ/106486