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Testing for Avoidance of Environmental Obligations

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  • Muehlenbachs, Lucija

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    (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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    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. 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.
    2. 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.
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    16. 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.
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