Transportation Infrastructure Decision Flexibility in Response to Climate Change and Demand Uncertainties: The Mackenzie Valley Highway in Canada’s Northwest Territories

Abstract

Barge transport operations on the Mackenzie River, a major transportation corridor in the Northwest Territories, are impacted by multiple sources of uncertainties. In particular, the impacts of climate change on this important corridor have led to summer shipping seasons that are growing more volatile in terms of length and quality. This change can lead to a growing reliance on costly airlifts for delivering essential freight that cannot be delivered by barge during seasons that end early due to low water. The Government of Northwest Territories has been planning the construction of the Mackenzie Valley Highway (MVH) for decades to provide cheaper, more reliable transportation for communities. However, the costs of constructing the MVH are prohibitive, and traditional benefit-cost analyses are unable to consider flexible investment actions in response to uncertainties. Therefore, we apply a real options modeling framework to determine if and when to construct the different segments of the MVH, considering climate change and freight demand uncertainties. We first model climate and freight demand uncertainties as geometric Brownian motion processes. Next, a benefit-cost model is developed. Finally, we use the least-squares Monte Carlo method to solve for extended project values and optimal investment times for each segment. The results indicate that Segment 2 has the largest value with an optimal seven-year delay in investment time, followed by Segment 1, Segment 3, and Segment 4 in the last year of the planning period (or possibly beyond). Freight demand volatility appears to have the greatest impact on project values and investment years. The results show that, although the benefits of construction may not outweigh the costs now, they may at some future date; in between, decision makers have opportunities to change their minds as conditions change. This is particularly important in northern Canada, where highly costly infrastructure investment decisions are subject to massive uncertainties. Overall, we see such an approach as a tool to communicate the value of uncertainty in infrastructure benefit-cost analyses and as one tool in a larger decision-support toolbox that is required for major transportation investments in northern Canada.