Real options analysis for valuation of climate adaptation pathways with application to transit infrastructure.

Climate change and sea-level rise (SLR) are expected to increase the frequency and intensity of coastal flood events, posing risks to coastal communities and infrastructure. While regional climate adaptation investments can provide substantive flood protection, existing plans often neglect uncertainty in future climate conditions and adaptation performance, consequently neglecting the option value of flexibly implementing proposed projects. Addressing this gap, we develop and employ a generalizable real options analysis (ROA) valuation framework that considers how uncertainty in adaptation project costs, SLR, flood severity, and flood losses inform the full range of adaptation performance outcomes. We further propose and apply a novel, computationally efficient flood loss sampling algorithm to estimate the consequences of randomly arriving coastal flood events. We apply this ROA framework to assess the option value of flexibly timing adaptation investments over time, investigating an adaptation pathway proposed by the City of Boston from the perspective of the regional transit system manager. Our results suggest that flexible implementation can provide significant option value in the near- to mid-term (>30 years), with the highest option values under low-probability, high-consequence scenarios. Our results also suggest adaptation pathway performance in the latter half of the 21st century is most sensitive to uncertainty in SLR, flood loss estimates, and flood frequency, underscoring the importance of uncertainty quantification in the long-term valuation of adaptation investments.

Forest fire management to avoid unintended consequences: a case study of Portugal using system dynamics.

Forest fires are a serious management challenge in many regions, complicating the appropriate allocation to suppression and prevention efforts. Using a System Dynamics (SD) model, this paper explores how interactions between physical and political systems in forest fire management impact the effectiveness of different allocations. A core issue is that apparently sound management can have unintended consequences. An instinctive management response to periods of worsening fire severity is to increase fire suppression capacity, an approach with immediate appeal as it directly treats the symptom of devastating fires and appeases the public. However, the SD analysis indicates that a policy emphasizing suppression can degrade the long-run effectiveness of forest fire management. By crowding out efforts to preventative fuel removal, it exacerbates fuel loads and leads to greater fires, which further balloon suppression budgets. The business management literature refers to this problem as the firefighting trap, wherein focus on fixing problems diverts attention from preventing them, and thus leads to inferior outcomes. The paper illustrates these phenomena through a case study of Portugal, showing that a balanced approach to suppression and prevention efforts can mitigate the self-reinforcing consequences of this trap, and better manage long-term fire damages. These insights can help policymakers and fire managers better appreciate the interconnected systems in which their authorities reside and the dynamics that may undermine seemingly rational management decisions.