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Option values of low carbon technology policies: how to combine irreversibility effects and learning-by-doing in decisions

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  • Finon, D.
  • Meunier, G.

Abstract

In this paper, the political dilemma of the deployment of a large-size low carbon technology (LCT) is analyzed. A simple dynamic model is developed to analyze the interrelation between irreversible investments and learning-by-doing within a context of exogenous uncertainty on carbon price. Contrasting results are obtained. In some cases, the usual irreversibility effects hold, fewer plants of the LCT should be developed when information is anticipated. In other cases, this result is reversed and information arrival can justify an early deployment of the LCT. More precisely, it is shown that marginal reasoning is limited when learning by-doing, and more generally endogenous technical change, is considered. When information arrival is anticipated the optimal policy can move from a corner optimum with no LCT deployment to an interior optimum with a strictly positive development.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1231.pdf
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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1231.

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Date of creation: 19 Jun 2012
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Handle: RePEc:cam:camdae:1231

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Web page: http://www.econ.cam.ac.uk/index.htm

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Keywords: investment; option value; learning-by-doing;

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  1. Sue Wing, Ian, 2006. "Representing induced technological change in models for climate policy analysis," Energy Economics, Elsevier, vol. 28(5-6), pages 539-562, November.
  2. Baker, Erin & Shittu, Ekundayo, 2006. "Profit-maximizing R&D in response to a random carbon tax," Resource and Energy Economics, Elsevier, vol. 28(2), pages 160-180, May.
  3. Nemet, Gregory F., 2006. "Beyond the learning curve: factors influencing cost reductions in photovoltaics," Energy Policy, Elsevier, vol. 34(17), pages 3218-3232, November.
  4. Manne, Alan S. & Barreto, Leonardo, 2004. "Learn-by-doing and carbon dioxide abatement," Energy Economics, Elsevier, vol. 26(4), pages 621-633, July.
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