Elisa Sainz de Murieta

Investing in Adaptation: Flood Risk and Real Option Application to Bilbao

Abstract Investment decisions in adaptation are usually made under significant uncertainty due to climate change and socio-economic trends. In this study, we propose three ways to incorporate climate and socio-economic uncertainty into the assessment of an adaptation infrastructure designed to cope with flood-risk in the city of Bilbao. First, we use stochastic modelling to estimate the present value of expected damage over a time period, considering that extreme events may increase in the future. Second, we develop an additional calculation that incorporates two risk measures used in financial economics: Value-at-Risk and Expected Shortfall, the latter being a less common but better risk indicator. Third, we illustrate a case of Real Options Analysis (ROA) in which a binomial tree is used to study whether the best decision at present is to invest now or to delay the investment decision.

Climate Risk Assessment under Uncertainty: An Application to Main European Coastal Cities

This paper analyses the risk of extreme coastal events in major European coastal cities using a stochastic diffusion model that is calibrated with the worst case emission scenario from the Intergovernmental Panel for Climate Change (IPCC), i.e. the representative concentration pathway (RCP) 8.5. The model incorporates uncertainty in the sea-level rise distribution. Expected mean annual losses are calculated for 19 European coastal cities, together with two risk measures: the Value at Risk (VaR) and the Expected Shortfall (ES). Both measures are well-known in financial economics and enable us to calculate the impact of the worst SLR paths under uncertainty. The results presented here can serve as valuable inputs for cities in deciding how much risk they are willing to accept, and consequently how much adaptation they need depending on the risk aversion of their decision-makers.

Climate policy at the sub-national level

Chapter 8 discusses how national climate legislation is complemented by action at the regional, state and municipal level. The importance of sub-national actors is increasingly recognized in the international negotiations, and the Paris Agreement includes an explicit requirement to integrate climate policies across all levels of government. Responsibility for the implementation of national policies in key areas such as energy, transport and the environment is often devolved to the sub-national level. This gives cities and regions a formal role in national efforts to reduce emissions. Sub-national actors are also central to climate resilience. Adaptation to climate change is very context-specific and requires the close involvement of local stakeholders. The chapter documents how sub-national governments are often taking the lead in climate policy, assuming commitments that can exceed those made at national level. However, the coexistence of regional and national climate policies can create coordination problems and a high degree of collaboration among all levels of governance is essential.