Economic Assessment of Flood Control Facilities under Climate Uncertainty: A Case of Nakdong River, South Korea

Abstract

Abstract:Climate change contributes to enhanced flood damage that has been increasing for the last several decades. Understanding climate uncertainties improves adaptation strategies used for investment in flood control facilities. This paper proposes an investment decision framework for one flood zone to cope with future severe climate impacts. This framework can help policy-makers investigate the cost of future damage and conduct an economic assessment using real options under future climate change scenarios. The proposed methodology provides local municipalities with an adaptation strategy for flood control facilities in a flood zone. Using the proposed framework, the flood prevention facilities in the Nakdong River Basin of South Korea was selected as a case study site to analyze the economic assessment of the investments for flood control facilities. Using representative concentration pathway (RCP) climate scenarios, the cost of future flood damage to 23 local municipalities was calculated, and investment strategies for adaptation were analyzed. The project option value was determined by executing an option to invest in an expansion that would adapt to floods under climate change. The results of the case study showed that the proposed flood facilities are economically feasible under both scenarios used. The framework is anticipated to present guidance for establishing investment strategies for flood control facilities of a flood zone in multiple municipalities' settings.

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

“…Their results showed that adopting a real-options allowing for flexibility in planning improved the economic feasibility of the investment in flood control. Furthermore, Kim and Kim ( 2018 ) modelled the volatility of returns under the RCP4.5 and RCP8.5 climate scenarios of the IPCC’s representative concentration pathway. In the considered scenarios, they showed that investments in flood control facilities that would not have been undertaken based on a NPV criterion would be undertaken if option values were taken into account.…”

Real Options Analysis for Land and Water Solar Deployment in Idle Areas of Agricultural Dam: A Case Study of South Korea

“…The logarithmic cash flow returns method provides volatility based on the variability of the same cash flow estimates used to calculate the underlying asset value [7]. This method has been used in several studies [7,20,[28][29][30][31][32]. Thus, we adopted logarithmic cash flow returns in our study.…”

A Real Options‐Based Decision‐Making Model for Infrastructure Investment to Prevent Rainstorm Disasters

“…With the development of global climate system theory, natural disasters and economic losses can now be directly predicted by future climate change scenarios. Kim et al (2017), Kim and Kim (2018) used the representative concentration pathway (RCP) climate scenarios to simulate future precipitation and rainfall disasters expected in the next 50 years. They collected historical data on the intensity of extreme rainfall and the economic losses in the affected area and proposed a loss function to predict future losses.…”