Discount Rate Selection for Investments in Climate Change Adaptation and Flood Risk Reduction Projects
Publication: Journal of Management in Engineering
Volume 39, Issue 4
Abstract
The selection of an appropriate discount rate is a critical yet often neglected aspect of valuing flood protection and climate adaptation projects. We examine current discounting practices in flood risk management and climate adaptation literature and compare these practices with a proposed fair market value (FMV) discounting approach, in which we discount project cash flows based on their levels of systematic market risk, consistent with practice in the private sector. Using publicly available data, we demonstrate minimal correlation between flood risk–related cash flows and overall market returns, suggesting flooding-related cash flows are most appropriately discounted near the risk-free rate. We consider the example of a proposed storm surge barrier in Boston Harbor and compare prevailing public-sector discounting approaches with this FMV approach. Our results suggest prevailing discounting approaches systematically undervalue flood risk reduction benefits and climate adaptation investments relative to the private-sector valuation implied via the FMV approach.
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Data Availability Statement
Some or all data, models, or code that support the findings of this study are available from the corresponding author upon reasonable request.
Acknowledgments
The authors would like to thank Professor Deborah Lucas (MIT) for her constructive feedback and review of this manuscript. This study was funded by the Massachusetts Bay Transportation Authority (MBTA) and the US Department of Defense (via the DoD SMART Scholarship-for-Service Program). The opinions expressed in this paper are those of the authors and do not represent those of the MBTA or DoD.
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Information
Published In
Journal of Management in Engineering
Volume 39 • Issue 4 • July 2023
Copyright
© 2023 American Society of Civil Engineers.
History
Received: Dec 5, 2022
Accepted: Mar 17, 2023
Published online: May 12, 2023
Published in print: Jul 1, 2023
Discussion open until: Oct 12, 2023
ASCE Technical Topics:
- Business management
- Climates
- Coastal engineering
- Coastal processes
- Coasts, oceans, ports, and waterways engineering
- Construction engineering
- Construction management
- Disaster risk management
- Environmental engineering
- Financial management
- Floods
- Investments
- Practice and Profession
- Project management
- Risk management
- Storm surges
- Water and water resources
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