Testing for Avoidance of Environmental Obligations
AbstractThe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-12-12.
Date of creation: 22 Feb 2012
Date of revision:
environmental remediation; real options; structural estimation;
Find related papers by JEL classification:
- Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
- Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-08 (All new papers)
- NEP-ENE-2012-03-08 (Energy Economics)
- NEP-ENV-2012-03-08 (Environmental Economics)
- NEP-PPM-2012-03-08 (Project, Program & Portfolio Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Slade, Margaret E., 2001. "Valuing Managerial Flexibility: An Application of Real-Option Theory to Mining Investments," Journal of Environmental Economics and Management, Elsevier, vol. 41(2), pages 193-233, March.
- 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.
- Gamba, Andrea & Tesser, Matteo, 2009.
"Structural estimation of real options models,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(4), pages 798-816, April.
- Stensland, Gunnar & Tjostheim, Dag, 1989. "Optimal Investments Using Empirical Dynamic Programming with Application to Natural Resources," The Journal of Business, University of Chicago Press, vol. 62(1), pages 99-120, January.
- Libecap, Gary D & Wiggins, Steven N, 1984. "Contractual Responses to the Common Pool: Prorationing of Crude Oil Production," American Economic Review, American Economic Association, vol. 74(1), pages 87-98, March.
- John Rust & Christopher Phelan, 1997.
"How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets,"
Econometric Society, vol. 65(4), pages 781-832, July.
- John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994.
- Tarek M. Harchaoui & Pierre Lasserre, 1995.
"Testing the Option Value Theory of Irreversible Investment,"
CIRANO Working Papers
- Harchaoui, Tarek M & Lasserre, Pierre, 2001. "Testing the Option Value Theory of Irreversible Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 141-66, February.
- Harchaoui, T. & Lasserre, P., 1995. "Testing the Option Vakue Theory of Irreversible Investment," G.R.E.Q.A.M. 95b04, Universite Aix-Marseille III.
- Tarek M. Harchaoui & Pierre Lasserre, 1999. "Testing the Option Value Theory of Irreversible Investment," Cahiers de recherche du DÃ©partement des sciences Ã©conomiques, UQAM 9905, Université du Québec à Montréal, Département des sciences économiques.
- Tarek M. Harchaoui & Pierre Lasserre, 1999. "Testing the Option Value Theory of Irreversible Investment," CIRANO Working Papers 99s-35, CIRANO.
- 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.
- Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
- Dixit, A., 1988.
"Entry And Exit Decisions Under Uncertainty,"
91, Princeton, Department of Economics - Financial Research Center.
- Ryan Kellogg, 2010. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," NBER Working Papers 16541, National Bureau of Economic Research, Inc.
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Chermak Janie M. & Patrick Robert H., 1995. "A Well-Based Cost Function and the Economics of Exhaustible Resources: The Case of Natural Gas," Journal of Environmental Economics and Management, Elsevier, vol. 28(2), pages 174-189, March.
- Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
- Mason, Charles F., 2001. "Nonrenewable Resources with Switching Costs," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 65-81, July.
- Hurn, A S & Wright, Robert E, 1994. "Geology or Economics? Testing Models of Irreversible Investment Using North Sea Oil Data," Economic Journal, Royal Economic Society, vol. 104(423), pages 363-71, March.
- 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.
- Alberto Moel, 2002. "When Are Real Options Exercised? An Empirical Study of Mine Closings," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 35-64, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster).
If references are entirely missing, you can add them using this form.