C.3 Exploratory Data Analysis

6.5 Conclusion

sunk costs. Thus, the framework allows for a significant increase in the value of adaptation investments above the current NPV by allowing for investment flexibility.

Although ROAs provide a great deal of flexibility and are useful in guiding investments decisions for climate change adaptation, the approach itself comes at the cost of being compli-cated to implement in practical applications, as argued by Dittrich et al. (2019). The authors thus address some of these challenges for policy makers when using ROA and provide a more simplistic approach. The implementation is done using a spreadsheet format with backward induction for the case of afforestation as a flood management measure in a rural catchment in Scotland. Using an exceedance probability of 5%, the goal accordingly is to minimize the life cycle cost and to prevent flooding. The derivation of the transition probabilities is obtained by slicing potential climate change paths –here the expected change in rainfall intensity– into quartiles. The mean return level estimate of each quartile represents then the event nodes used in the decision tree used for the real options approach.

There is an ongoing debate in the literature about the usefulness of the ROA for climate change adaptation. On the one hand Kwakkel (2020) argues that the ROA approach is not free from criticism. In particular, the underlying assumptions of estimating the value of an option for a flexible climate change adaptation strategy can be seen as problematic. For once, the ROA requires the choice of a baseline scenario against which the option value is to be estimated.

This choice might not be obvious, and changing it might substantially change the option value itself. Additionally, one could argue that the typically long time horizons for climate adaptation strategies render the probabilities and weights assigned for scenarios a meaningless task, given the uncertainty and dynamic nature of future scenarios.

On the other hand, Wreford et al. (2020) argue that ROAs can help make investment deci-sions more efficient when considering uncertainty and new information simultaneously, as this situation reflects real-world characteristics. Moreover, they discuss the differences between tra-ditional ROAs – originating from financial literature designed to determine option values – and scenario-based ROAs and their potential use for climate adaptation decisions. According to authors, scenario-based ROA especially seem to be a logical extension when the CBA is used in the same manner and might help overcome some of the limitations of traditional ROA approaches. However, further development and cooperation between researchers and policy makers is required to improve the implementation of ROAs for adaptation decisions.

a decision tool to policy makers by ranking adaptation options based on criteria weights. This allows for flexibility to integrate adaptation options, the social costs induced by distributional effects of adaptation, and the aesthetic impact of adaptation strategies in a meaningful way.

These presented methods are, however, not mutually exclusive and can be combined with hy-brid analysis. Although these methods have a long record of successful evaluation of climate change adaptation projects, policy makers have to make decisions under uncertainty . This might put a strain on the validity of the results obtained by traditional methods and requires more robust approaches by integrating a broad range of climate change scenarios (Dittrich et al.


One possible solution would be to use a robust decision-making strategy that allows for a (not necessarily optimal) decision between multiple scenarios by finding the least vulnera-ble strategy (Batouli and Mostafavi 2016; Lazarow and Capon 2016). Moreover, a real options framework can be used to take climate change uncertainty into account, as well as to consider the value of flexibility of investments for coastal adaptation projects. A ROA as such should be preferred over CBA or using a simple NPV rule, as it allows for optimization of the timing of an investment by incorporating the uncertainty associated with climate change.

Given that coastal areas are particularly at risk due to rising global sea-levels, and that nat-ural hazard losses are likely to increase in the near future, adaptation strategies play a crucial role in the management of coastal regions. This work has presented a broad range of existing valuation methods by describing the methods and their possible drawbacks and providing ex-amples of practical applications. Further research should concentrate on improving the existing valuation methods in terms of their complexity and flexibility across climate change scenarios.

Chapter 7

Long-Term Trends in the Australian Wave Climate

The following chapter is based on the paper:

Title: Long-Term Trends in the Australian Wave Climate Authors: Christoph FUNK(contribution: 80%) and

Stefan TRÜCK(contribution: 20%) Status: Working Paper

Long-Term Trends in the Australian Wave Climate

Christoph FUNK1,2 Stefan TRÜCK7


Global mean sea levels have risen substantially over the last century. This has important implications for low-elevation coastal regions around the world, as they are particularly vulnerable to rising sea levels. In our analysis we focus on the wave power (WP) as climate change indicator for coastal regions. WP, the energy transmitted in the direction of wave propagation, can potentially characterize the long-term behavior of the global wave conditions better than wave heights (Reguero et al. 2019). Our contributions to the literature are twofold.

First, we investigate long-term trends in WP and wave height at the local scale, using a comprehensive data set consisting of 18 wave rider buoys along Australia’s eastern and southeast coasts. Second, we introduce Laplacian embedding as a potential tool for investigate temporal and spatial variation in the wave climate between and within different locations.

This allows us to compare the distribution of the WP over time and to get new insights on the wave climate along the Australian coast. Our results suggest that the WP along the Central Australian Coast seems to have a different behavior than those of the WP measured for the northern and southern parts of Australia. In addition, we find several potential decadal changes in the WP distribution for the median, 90th and 99th percentiles throughout the last 40 years. Results from the latest decades confirm that extreme values seem to have increased for the northern and southern parts of the Australian east coast, whereas they have decreased for central parts of the eastern coastline. Moreover, we find an increase in the yearly mean WP in Brisbane, Tweed Heads, Coffs Harbour, and Port Kembla, we also find an alarming increase in the 99th percentile, or the maximum, over the evaluation period for seven out of the 18 locations. A failure to take into account such trends will lead to an under- or overestimation of the potential risk posed by maximum WP and wave height.

Keywords: Wave climate, Wave power, Long-term trends, Laplacian embedding, Decadal change

1 Faculty of Economics and Business Studies, Department of Statistics and Econometrics, Justus Liebig University Giessen, Licher Str. 64, Giessen, Germany

2 Department of Actuarial Studies and Business Analytics, Macquarie University, Sydney, Australia

In document Essays on the Econometric Analysis of Energy Markets and Climate Change (Page 165-169)