Using Real Options Analysis to evaluate the impacts of climate change on water security

Abstract

In this paper the applicability of using Real Options Analysis to understand and measure the impacts of strategies deployed to counter the effects of climate change in a river catchment, are explored. The advantages of Real Options Analysis over the traditional discounted cash flow approaches are detailed. In addition, two limitations of the approach (the problems associated with assessing the very long time periods involved in climate change and the lack of estimated probabilities with which to assess various options) are identified. In terms of assessing the long term impacts of climate change, it is suggested that the analysis should be split into three manageable time horizons of 30 year..