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On the option to invest in pollution control under a regime of tradable emissions allowances

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  • Margaret Insley

Abstract

Optimal decisions of a firm facing the option of retrofitting its plant to reduce pollution and thereby eliminate the need to purchase emissions allowances are analysed. The decision is treated as a real option with the price of pollution permits following a known stochastic process. The model is formulated as a set of one-dimensional partial differential equations. At discrete points in time, the firm owner makes optimal decisions about the retrofit, including whether to mothball temporarily. The model is used to analyse a firm's decision to instal a scrubber as a result of the 1990 U.S. Clean Air Act.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 36 (2003)
Issue (Month): 4 (November)
Pages: 860-883

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Handle: RePEc:cje:issued:v:36:y:2003:i:4:p:860-883

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