This paper shows that the choice for the type of probability distribution is crucial in Real Option Analysis, because it could lead to different outcomes. This is illustrated by using the beta distribution and its special cases, such as the PERT and uniform distribution to model parking garage demand uncertainty. These distributions are commonly used when there is no data available about the stochastic variable, i.e. demand uncertainty. Beta distributions are more flexible than the PERT and uniform distribution. One of the major challenges is the practicality of the beta distribution. A good solution to this challenge is provided by the PERT distribution, because of its ease-of-use and it is more flexible than the uniform distribution. In this research, the Real Options Approach of de Neufville et al. (2006) is used as the base case for modelling of the parking garage demand and is refined to allow for more generic, flexible and practical applications of the model. The impact of different probability distributions is studied on the basis of an expansion option.

The Global Carbon Market Mechanism (GCMM) aims to incentivize national or sub‐national actors to invest in climate mitigation projects at the same time as limiting the global costs of tackling global warming. Using the worked example of the Clean Development Mechanism (CDM), this article shows that the exact valuation of a mitigation project requires the application of compound real options techniques, as it is able to account for the multi‐staged nature of a project cycle, as well as the two basic sources of uncertainty (the probability of not moving successfully to the next stage of the cycle, technical risk, and the uncertainty related to future emission reduction credit prices, market risk). Using parameters from the global database of registered CDM projects, this article illustrates that longer than projected lead times, higher than projected transaction costs, and higher than projected rates of failure lowered the value of investing in CDM projects considerably, alongside offset prices and their variability. Regulators of and participants within the patchwork of existing emission trading schemes and market mechanisms, including the GCMM (Article 6.4 of the Paris Agreement), could benefit through wider appreciation of the benefits of this valuation method.

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