Using real options for urban infrastructure adaptation under climate change

Abstract Climate uncertainties pose a problem for decision makers as they cannot choose and implement an effective adaptation strategy in infrastructure. An effective adaptation strategy can be derived only when the potential damage induced by climate change is well understood. This study proposed a decision-making model to evaluate the economic feasibility of the adaptation projects in an urban area. The climate scenarios and the economic and technical factors were used to calculate the volatility that reflects the potential damage reduction of an urban area. The model relies on a type of real options, called the “chooser option”, to consider managerial flexibility for long-term management of urban infrastructure. The proposed model can estimate the economic value of investment with reasonable accuracy based on the representative concentration pathway (RCP) climate scenarios. A case study involving a disaster prevention facility in Seoul, Korea was conducted to demonstrate the model’s applicability. The model is expected to provide guidance for the development of effective adaptation strategies for urban infrastructure.