Analyzing investments for managing Lake Erie levels under climate change uncertainty

Analyses of investments that are irreversible and have uncertain benefits s hould consider the option of delaying a decision. For instance, the benefit s of many water resource projects could change if global warming occurs. Th e magnitude of that warming is uncertain, and delaying projects until more information is available might be optimal. We examine whether this is true for construction of an outflow control structure for Lake Erie. Using Bayes ian Monte Carlo (BMC)-based decision analysis, we find that considering cli mate uncertainty does make a difference. Climate change beliefs, in the for m of prior distributions over transient climate scenarios, can affect the o ptimal strategy: in particular, climate change makes delaying construction more attractive. The option value of deferring the decision to build is as high as $20 million. Ignoring the possibility of climate warming can inflic t an expected penalty as large as 20% of the cost of the control structure. We also compare climate risks to uncertainties in stage-damage curves and find that they are approximately of equal importance.