INVESTMENT IN FLOOD PROTECTION MEASURES UNDER CLIMATE CHANGE UNCERTAINTY

Abstract

Recent severe river flooding in Europe has triggered debates among scientists and policy-makers on future projections of flood frequency and the need for adaptive investments, such as flood protection measures. Because there exists uncertainty about the impact of climate change on flood risk, such investments require a careful analysis of expected benefits and costs. The objective of this paper is to show how climate change uncertainty affects the decision to invest in flood protection measures. We develop a model that incorporates flexible timing of investment decisions and scientific uncertainty on the extent of climate change impact. This model allows decision-makers to cope with the uncertain impact of climate change on the frequency and damage of river flood events and minimizes the risk of under- or over-investment. One of the innovative elements of our paper is that we explicitly distinguish between structural and non-structural flood protection measures. Our results show that the effects of uncertainty on the optimal initial investment depends on the cost structure of these measures which has several important implications for flood management policy.