Incorporating the impacts of climate change in transportation infrastructure decision models

Historically an important transportation corridor in the Northwest Territories, climate change has shortened the duration of the Mackenzie River’s navigational season. Communities rely increasingly on airlift as the growing volatility affects barging operations, leading to higher overall freight costs. Using an options approach, we present a methodological framework that supports flexible infrastructure decision making, accounting for the impacts of climate change uncertainty. We apply this method to the decision of whether to continue barging on the Mackenzie River, or connect the entire corridor by extending the all-weather Mackenzie Valley Highway, explicitly considering uncertainties in river barging conditions. 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. Second, we evaluate the expected cost of barging and airlift each season 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. This paper demonstrates that when we explicitly incorporate the impact of climate change on project valuations, particularly those in northern and Arctic Canada 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 method can assist federal and territorial governments in communicating the impacts of climate change on communities, and provide another tool to support multi-layered, complex transportation infrastructure investment decisions that address these rapidly changing environments.