The value of dynamic remediation processes: a real option approach

Abstract

Restricted by limited resources, the management of problems related to soil and groundwater contamination involves the search for a balance between costs and bene fits, integrating the knowledge from multiple disciplines. A wide range of economic decision tools are available to support the remediation selection process, including Cost Bene fit Analysis (CBA), risk-based CBA, and multi-criteria analysis. However, these tools do not take into account the reversibility of a remediation strategy. Aim of this study is to examine the value of a bioremediation project embedding the option to redirect the remediation process once it is proved that the investment would not be economically feasible.A dynamic decision model is developed to determine the critical level of 'bad' groundwater samples at which the remediation process should be redirected. This model is then applied on a fi ctive case study in which a fi rm faces the decision to continue a bioremediation strategy or to redirect the remediation process. It is shown that when remediation strategies are considered as dynamic processes, the value of remediating contaminated soil and groundwater increases.