The option to abandon: Stimulating innovative groundwater remediation technologies characterized by technological uncertainty

• Published in: The Science of the total environment Vol. 496; pp. 63 - 74
• Main Authors: Compernolle, T., Van Passel, S., Huisman, K., Kort, P.
• Format: Journal Article
• Language: English
• Published: Netherlands Elsevier B.V 15.10.2014
• Subjects: Abandonment; Cost-Benefit Analysis; Decision Support Techniques; Environmental Restoration and Remediation - methods; Groundwater - chemistry; Groundwater remediation; Investment decision; Investments; New technology; Optimization; Product innovation; Real options; Strategy; Technology; Time Factors; Uncertainty; Water Pollutants, Chemical - analysis; Groundwater remediation; Investment decision; Uncertainty; Real options; Technology
• ISSN: 0048-9697; 1879-1026
• DOI: 10.1016/j.scitotenv.2014.07.019

Many studies on technology adoption demonstrate that uncertainty leads to a postponement of investments by integrating a wait option in the economic analysis. The aim of this study however is to demonstrate how the investment in new technologies can be stimulated by integrating an option to abandon. Furthermore, this real option analysis not only considers the ex ante decision analysis of the investment in a new technology under uncertainty, but also allows for an ex post evaluation of the investment. Based on a case study regarding the adoption of an innovative groundwater remediation strategy, it is demonstrated that when the option to abandon the innovative technology is taken into account, the decision maker decides to invest in this technology, while at the same time it determines an optimal timing to abandon the technology if its operation proves to be inefficient. To reduce uncertainty about the effectiveness of groundwater remediation technologies, samples are taken. Our analysis shows that when the initial belief in an effective innovative technology is low, it is important that these samples provide correct information in order to justify the adoption of the innovative technology. •The adoption of a new groundwater remediation strategy under uncertainty is studied.•The ex ante decision and the ex post evaluation of the investment are considered.•Contrary to the standard real option effect, an option value stimulates investment.•If performance indicators provide correct information investment is justified.•Authorities should allow for flexibility within the remediation project.