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Testing for Avoidance of Environmental Obligations

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  • Muehlenbachs, Lucija

    () (Resources for the Future)

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    Abstract

    The environmental remediation required to permanently decommission most industrial projects is an expensive and irreversible investment. Real options literature shows that temporarily closing a project and postponing decommissioning has value when economic conditions are uncertain and future reactivation is possible. However, high decommissioning costs create an incentive to “temporarily” close a project, even when there is no intention to reactivate. This paper estimates a dynamic discrete choice model of closure to evaluate the likelihood of reactivation. The model reveals that the option to temporarily close is being widely used to avoid environmental remediation of oil and gas wells in Canada.

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-12-12.pdf
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    Bibliographic Info

    Paper provided by Resources For the Future in its series Discussion Papers with number dp-12-12.

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    Date of creation: 22 Feb 2012
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    Handle: RePEc:rff:dpaper:dp-12-12

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    Keywords: environmental remediation; real options; structural estimation;

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    1. Cortazar, Gonzalo & Casassus, Jaime, 1998. "Optimal Timing of a Mine Expansion: Implementing a Real Options Model," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 755-769.
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    8. repec:att:wimass:9430 is not listed on IDEAS
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    12. Boyd, James, 2001. "Financial Responsibility for Environmental Obligations: Are Bonding and Assurance Rules Fulfilling Their Promise?," Discussion Papers dp-01-42, Resources For the Future.
    13. Ryan Kellogg, 2010. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," NBER Working Papers 16541, National Bureau of Economic Research, Inc.
    14. Livernois, John R & Uhler, Russell S, 1987. "Extraction Costs and the Economics of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 195-203, February.
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