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Using ex post data to estimate the hurdle rate of abatement investments - an application to sulfur emissions from the Swedish pulp and paper industry and energy sector

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Abstract

We propose a method for estimating hurdle rates for firms' investments in pollution abatement technology, using ex post data. The method is based on a structural option value model where the future price of polluting fuel is the major source of uncertainty facing the firm. The econometric procedure is illustrated using a panel of firms from the Swedish pulp and paper industry, and the energy and heating sector from 2000 to 2003. The results indicate a hurdle rate of investment of 2.9 in the pulp and paper industry and 3.4 in the energy and heating sector.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2008/V08017.pdf
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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number v08017.

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Length: 29 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:mse:cesdoc:v08017

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Keywords: Option value; fuel price uncertainty; investment decision; pollution abatement; panel data; pulp and paper industry; energy and heating sector.;

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