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Incorporating climate change uncertainty into transportation infrastructure investment decisions
- Author / Creator
The Mackenzie River is a historically important transportation corridor of the Northwest Territories, allowing for barge freight transport to remote communities throughout its length. However, more recently, climate change has affected the duration of the Mackenzie River’s navigational season, making it both shorter and more uncertain. Thus, communities increasingly rely on winter roads and airlift, leading to higher overall freight costs. Using options approaches, this thesis presents an analysis of the decisions of whether to continue barging on the Mackenzie River each year or when (and how) to connect the entire corridor by extending the all-weather Mackenzie Valley Highway, explicitly considering multiple uncertainties (e.g. climate, freight demand) challenging decision-makers and operators. We develop a comprehensive methodological framework that supports flexibility in infrastructure investment decisions.
The proposed methodological framework includes three parts: Modeling of uncertain inputs, cost-benefit analysis, and real options analysis. We apply it to two investment decision scenarios for the all-weather Mackenzie Valley Highway from Wrigley to Inuvik: 1) The entire road as a single construction project under future climate uncertainty, and 2) The roadway as four separate construction projects to be built in stages, considering multiple future climate and freight demand uncertainties.
For the first scenario, we first model river open season days as a stochastic process; barging is dependent on the number of open season days, which in turn is affected by climate change. Then, we evaluate the decision to continue barging and airlift service each year using a modified Black-Scholes model. Finally, we use real options to determine how long construction of the all-weather highway may be deferred. The results indicate that it is advisable to defer construction nearly a decade, in balancing the costs of construction against climate change uncertainty. We also perform a sensitivity analysis of key inputs and parameters; highway project valuation is quite sensitive to highway investment cost, climate proxy volatility, and airlift costs while less so to freight volumes.
For the second scenario, we model climate uncertainty and freight demand uncertainties as stochastic processes similar to the previous model. Then, a cost-benefit analysis of building different all-weather segments at different times is discussed. Finally, we apply a Least Squares Monte Carlo (LSM) method to solve the extended project value, optimal investment times and investment priorities. The results indicate that Segment 2 (Tulita – Norman Wells) has the largest value ($819M), with a recommended deferral of one year. The resulting sequence of construction is Segment 2 (Tulita – Norman Wells, one-year deferral), Segment 1 (Wrigley – Tulita, six-year deferral), Segment 3 (Norman Wells–Fort Good Hope, 13-year deferral), and Segment 4 (Fort Good Hope – Inuvik, 14-year deferral).
This research also demonstrates that when we explicitly incorporate the impact of climate change on project valuations, particularly those in Northern Canada and the Arctic where these impacts are considerable, project valuations can change significantly such that all-weather road construction is supported, even if it is deferred to future years. This study can assist federal and territorial governments in understanding the growing criticality of accounting for and adapting to uncertainties arising from climate change and other sources in infrastructure planning, and provide another tool to support multi-layered, complex transportation infrastructure investment decisions that address these rapidly changing environments.
- Graduation date
- Fall 2019
- Type of Item
- Master of Science
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