ABSTRACT
Real options (RO) methodology is a growing area of analysis that is applicable to a variety of irreversible decisions. Recently, it has also been used in environmental policy analysis. In this context, real options analysis (ROA) provides a way to evaluate climate policy strategies that require irreversible decisions with uncertain results in the future. Climate change policy, to some extent, can be described as a selection between different alternatives with little flexibility to change the decision in the future. As we mentioned in Chapter 1, if, during the next 20 to 30 years, world GHG emissions grow according to a projected trajectory of business-as-usual, there will be little chance to keep temperatures within 2°C above the temperatures of the preindustrial era-the limit scientists recommend. However, regulators could impose GHG emissions limits and prevent irreversible temperature increases. Regulators can select interim emissions targets that later could be revised depending upon new information about the response of the climate system to anthropogenic interference, and the response of the socioeconomic system to climate change.
