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Optimal abatement investment and environmental policies under pollution uncertainty

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  • Saltari, Enrico
  • Travaglini, Giuseppe

Abstract

In this paper we present a continuous time model with reversible abatement capital in order to analyze the effects of environmental policies on the value of the firm and investment decisions. We show that the effects depend on what sort of future policy are implemented. We focus on investment effects of changes in corrective taxes to control the use of polluting inputs, and subsidies to promote abatement investment. We show that (1) while taxes have a depressive effect on capital accumulation, subsidies boost investment; (2) the impact of these policies on the value of the firm is ambiguous. This latter result has important empirical implications insofar as investment are based on the average value of the firm rather than the (unobservable) marginal value.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35072.

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Date of creation: Mar 2011
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Handle: RePEc:pra:mprapa:35072

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Keywords: Pollution uncertainty; externality; capital reversibility; environmental policy;

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References

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  1. Shadbegian, Ronald J. & Gray, Wayne B., 2005. "Pollution abatement expenditures and plant-level productivity: A production function approach," Ecological Economics, Elsevier, Elsevier, vol. 54(2-3), pages 196-208, August.
  2. Travaglini, Giuseppe, 2012. "Trade-off between labor productivity and capital accumulation in Italian energy sector," Journal of Policy Modeling, Elsevier, Elsevier, vol. 34(1), pages 35-48.
  3. Fisher, Anthony C., 2000. "Investment under uncertainty and option value in environmental economics," Resource and Energy Economics, Elsevier, Elsevier, vol. 22(3), pages 197-204, July.
  4. Pindyck, Robert S., 2002. "Optimal timing problems in environmental economics," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(9-10), pages 1677-1697, August.
  5. Lin, Tyrone T. & Huang, Shio-Ling, 2010. "An entry and exit model on the energy-saving investment strategy with real options," Energy Policy, Elsevier, Elsevier, vol. 38(2), pages 794-802, February.
  6. Pindyck, Robert S., 1998. "Irreversibilities and the timing of environmental policy," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management WP 4047-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Smulders, J.A. & Gradus, R.H.J.M., 1996. "Pollution abatement and long-term growth," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-72815, Tilburg University.
  8. Calcagnini, Giorgio & Giombini, Germana & Saltari, Enrico, 2009. "Financial and labor market imperfections and investment," Economics Letters, Elsevier, Elsevier, vol. 102(1), pages 22-26, January.
  9. Giuseppe Travaglini, 2012. "Pollution control: targets and dynamics," Working Papers, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini 1201, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.
  10. Saltari Enrico & Travaglini Giuseppe, 2003. "How Do Future Constraints Affect Current Investment?," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 3(1), pages 1-21, June.
  11. Abel, Andrew B. & Eberly, Janice C., 1997. "An exact solution for the investment and value of a firm facing uncertainty, adjustment costs, and irreversibility," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(4-5), pages 831-852, May.
  12. Lin, Tyrone T. & Ko, Chuan-Chuan & Yeh, Hsin-Ni, 2007. "Applying real options in investment decisions relating to environmental pollution," Energy Policy, Elsevier, Elsevier, vol. 35(4), pages 2426-2432, April.
  13. repec:ebl:ecbull:v:5:y:2008:i:6:p:1-9 is not listed on IDEAS
  14. Saltari, Enrico & Travaglini, Giuseppe, 2006. "The effects of future financing constraints on capital accumulation: Some new results on the constrained investment problem," Research in Economics, Elsevier, Elsevier, vol. 60(2), pages 85-96, June.
  15. Saltari, Enrico & Travaglini, Giuseppe, 2011. "The effects of environmental policies on the abatement investment decisions of a green firm," Resource and Energy Economics, Elsevier, Elsevier, vol. 33(3), pages 666-685, September.
  16. Travaglini Giuseppe, 2008. "An exact consumption rule with liquidity constraints and stochastic income," Economics Bulletin, AccessEcon, vol. 5(6), pages 1-9.
  17. Ansar, Jasmin & Sparks, Roger, 2009. "The experience curve, option value, and the energy paradox," Energy Policy, Elsevier, Elsevier, vol. 37(3), pages 1012-1020, March.
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Citations

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Cited by:
  1. Travaglini, Giuseppe & Rugiero, Serena, 2011. "Efficienza energetica: misurazioni e impatti
    [Energy efficiency: measurement and impacts]
    ," MPRA Paper 34520, University Library of Munich, Germany.
  2. Travaglini, Giuseppe & Saltari, Enrico, 2012. "A model of waste control and abatement capital: Permanent versus temporary environmental policies," MPRA Paper 36522, University Library of Munich, Germany.
  3. Giuseppe Travaglini, 2012. "Pollution control: targets and dynamics," Working Papers, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini 1201, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.

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