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Student Advising M. Shah Alam Khan |
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Name of the student : Mohammad Rashed Jalal Program
: M .Sc (WRD)
Title: AN OPTIMAL STOPPING MODEL FOR WATER SECTOR ADAPTATION OPTIONS IN KHULNA
Background
and
Considering the estimated damage and adaptation costs, the probable adverse impacts on water resources due to climate change in an already vulnerable country like Bangladesh will put additional stress on overall development of the country [1, 2]. Conventional risk-based planning approach based on stationary climate, is likely to be ineffective given the large uncertainties about the magnitude and timing of the climate change. The approach to investment in adaptation has drawn predominantly from the traditional cost-benefit analysis (CBA) governed by Net-Present-Value (NPV) framework. However, considering the irreversibility of investment, uncertainty of future costs-benefits, and flexibility of timing, the pre-investment value to wait for further information is important to correctly model the investment decision [3]. Sub-optimal timing of adaptation investment may result in overinvestment or underinvestment. For Bangladesh, being fiscally constrained, optimal timing of adaptation investment is, hence, very critical in prudent allocation of its scarce resources toward climate resilient development.
Objectives with Specific
Aims and Possible Outcome:
This study will attempt, in a case study approach, to explore the implications of optimal timing of adaptation investments for two planned water sector investment projects [4] in Khulna - a coastal city highly exposed to climate change. The research is aimed at contributing to informed decision making on timing of adaptation investment under uncertainty. The specific objectives to attain the aim are threefold:
(i) to identify and assess the factors affecting the timing of adaptation investment; (ii) to develop and implement an optimal stopping model to analyze the timing of adaptation investment; and (iii) to analyze the sensitivities of the factors affecting the optimal timing of adaptation.
The research will primarily focus on the identification and assessment of the factors affecting the timing of adaptation investment which would lead this study work to provide indication of optimal timing of adaptation investment in the water sector of Khulna city.
Outline of Methodology:
Factors affecting the optimal decisions (e.g. hydro-climatic variables, adaptation costs, etc.) will be determined from literature review and experts' interviews. Damage from probable climate change will be modeled as a function of hydro-climatic variables under different climate scenarios and observed trends. Sector-wise damage functions developed in [4] along with damage information available from other secondary sources and collected through Focus Group Discussions (FGD) will be used to form the aggregated damage function.
Considering the hydro-climatic variables (i.e. sea level, rainfall, etc) as stochastic processes, formulation of differential equations and solution procedure for optimal decision given in [5] will be followed. Based on the time series analysis and literature review, change and variability of the hydro-climatic variables will be assumed. An optimal stopping model, based on the framework presented in [3], will be developed to consider the uncertainty in hydro-climatic variables and the consequent damages, and hence determine the optimal timing for adaptation. A stochastic dynamic programming approach will be used to explore the implications of change and variability of climate on the timing of adaptation investments. Optimal decisions will be determined for a range of values of the factors to determine the sensitivities of the factors on the optimal timing.
References:
Bates, B. C., Kundzewicz, Z. W., Wu, S. and Palutikof, J. P., "Climate Change and Water", (Eds) Technical Paper of the Intergovernmental Panel on Climate Change, IPCC Secretariat, Geneva, pp 210, 2008.
GoB, "Bangladesh Climate Change Strategy and Action Plan 2008", Government of the People's Republic of Bangladesh, Ministry of Environment and Forests, Dhaka, pp 68, 2008.
Wright, E. L. and Erickson, J. D., "Climate variability, economic adaptation and investment timing", Int. J. Global Environmental Issues, Vol. 3 No. 4, pp 357-368, 2003.
ADB, "Technical Assistance Consultant's Report, Bangladesh: Strengthening the Resilience of the Water Sector in Khulna to Climate Change", Project Number: 42469-01, Asian Development Bank, the Philippines, pp 566, 2010.
Dixit, A. K. and Pindyck, R. S., "Investment under Uncertainty", Princeton University Press, Princeton, pp 470, 1994.
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