In summary, the literature on real options does not offer a theoretical prior on the optimal timing or scale of investments. The value of parameters in the model and the type of uncertainty will influence the decision-making. However, the literature does imply the need for including the timing and scale of projects as alternatives in the evaluation framework, if there is the flexibility to do so. Foreclosing the possibility of adapting the decision-making to the information environment can reduce the net present value of the project.

# **4.3 Adaptive Management**

Adaptive management involves taking actions and monitoring the effects in order to produce information that reduces endogenous uncertainty. The term has several interpretations in the literature. Adaptive management is sometimes conceived of as a structured experimental approach, which systematically tests assumptions about the environment (Walters and Holling, 1990). In the seabed mining context, for example, a few tracts of seabed could be reserved, each representing a different ecological context for risk. Disturbing the habitat would provide insights about the environmental impacts of new technologies in various deep sea habitats.<sup>14</sup> The socalled DISCOL experiment, which has been running for over 30 years, is the closest example to this approach conducted on deep seabeds. An 8 meter wide “harrow plow” has been dragged over an area of the abyssal plain in the CCZ to observe the effects of disturbing the seabed (Heffernan 2019).

Piloting small-scale seabed mining trials would allow for small-scale actions to be taken with correspondingly small risks, as way to provide information about the costs, performance, and environmental impacts of DSM. Based on the information revealed from these activities, adjustments could be made in the resource development plan going forward – including the possibility of halting the operation. As of now, mining trials have not been conducted on deep seabeds. They have high upfront costs, and the possibility for scale-up faces regulatory uncertainty. Additionally, without realized or fairly certain returns, firms or the governments may be unwilling to fund the set up and implementation of costly monitoring programs.

Adaptive management can also be construed to allow for activities to proceed at full capacity with careful monitoring and evaluation. The assumption in this case is that ex post adjustments would be made on an as-needed basis as information accumulates.<sup>15</sup> This approach is consistent with the evolving DSM management strategy for international waters. Exploratory activities are being leased to produce baseline information; mining activities will be excluded from protected areas defined in environmental management plans (situated outside the exploration areas); and ex-post mining activities will be allowed to proceed with regulation and monitoring (Dunn et al.,

> 14 Whether or not mining is ultimately initiated, there is a public interest in deep seabed exploration taking place in order to generate marine and mineral scientific data. The value of this exploration externality should be considered in the initial decision between protecting or opening up areas for exploration.

> 15 The New Zealand’s Economic Zone and Continental Shelf (Environmental Effects) Act of 2012 (EEZ Act) requires adaptive management provisions in lease applications for seabed mining on continental shelves. As defined in the EEZ Act, adaptive management can include small scale experiments and pilot projects as well as full capacity development with monitoring and evaluation (Section 64(2); Sections 64(3,4)).

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