5. Dams and Catastrophe Risk: Discounting in Long Term Planning

Planning dams for regional economic developments and social welfare without addressing issues related to catastrophic risks may lead to dangerous clustering of people, production facilities, and infrastructure in hazard-prone areas. The concerned region may be exposed to very large losses from the low probability-high consequence event of a dam break. Endogeneity of risks on land use decisions represents new challenges for dam development planning. In this chapter we discuss an integrated risk management model that allows the planners to deal in a consistent way with the multiple aspects, views and objectives of dam projects. We introduce the notion of robust decisions, which are considered safe, flexible, and optimal because they account for multiple criteria, risks and heterogeneities of locations and stakeholders. Specific attention is paid to the choice of proper discount factors to address long-term planning perspectives of dam construction and maintenance. We illustrate how the misperception of proper discounting in the presence of potential catastrophic events may overlook the need for dam maintenance and undermine regional safety. The proposed model can be used as a learning-by-simulation tool for designing robust regulations and policies.