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Infrastructure investments under uncertainty with the possibility of retrofit : theory and simulations

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Author Info

  • Strand, Jon
  • Miller, Sebastian
  • Siddiqui, Sauleh

Abstract

Investments in large, long-lived, energy-intensive infrastructure investments using fossil fuels increase longer-term energy use and greenhouse gas emissions, unless the plant is shut down early or undergoes costly retrofit later. These investments will depend on expectations of retrofit costs and future energy costs, including energy cost increases from tighter controls on carbon emissions. Simulation analysis shows that the retrofit option can significantly reduce anticipated future energy consumption as of the time of initial investment, and total future energy plus retrofit costs. The more uncertain are the costs, the greater the value of this option. However, the future retrofit option also induces more energy-intensive infrastructure choices, partly offsetting the direct effect of having the option on anticipated energy use. Efficient, forward-looking infrastructure investments have high potential for reducing long-term energy consumption. Particularly if energy prices are expected to rise, however, the potential for reduced energy consumption will be eroded if expectations of energy prices do not include environmental costs or future retrofit possibilities and technologies are not adequately developed.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5516.

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Date of creation: 01 Jan 2011
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Handle: RePEc:wbk:wbrwps:5516

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Related research

Keywords: Energy Production and Transportation; Climate Change Economics; Climate Change Mitigation and Green House Gases; Environment and Energy Efficiency; Energy and Environment;

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References

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  1. Strand, Jon, 2010. "Inertia in infrastructure development : some analytical aspects, and reasons for inefficient infrastructure choices," Policy Research Working Paper Series 5295, The World Bank.
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  3. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2010. "The Environment and Directed Technical Change," Working Papers 2010.93, Fondazione Eni Enrico Mattei.
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  5. Gusdorf, Francois & Hallegatte, Stephane, 2007. "Behaviors and housing inertia are key factors in determining the consequences of a shock in transportation costs," Energy Policy, Elsevier, vol. 35(6), pages 3483-3495, June.
  6. François Gusdorf & Stéphane Hallegatte, 2007. "Compact or Spread-Out Cities: Urban Planning, Taxation, and the Vulnerability to Transportation Shocks," Working Papers 2007.17, Fondazione Eni Enrico Mattei.
  7. Golombek Rolf & Greaker Mads & Hoel Michael, 2010. "Carbon Taxes and Innovation without Commitment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-21, April.
  8. Edward L. Glaeser & Matthew E. Kahn, 2008. "The Greenness of Cities: Carbon Dioxide Emissions and Urban Development," NBER Working Papers 14238, National Bureau of Economic Research, Inc.
  9. Franck Lecocq & Jean-Charles Hourcade & Minh Ha-Duong, 1998. "Decision making under uncertainty and inertia constraints: sectoral implications of the when flexibility," Post-Print halshs-00002458, HAL.
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  11. Ha-Duong, Minh, 1998. "Quasi-option value and climate policy choices," Energy Economics, Elsevier, vol. 20(5-6), pages 599-620, December.
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Cited by:
  1. Framstad, Nils Chr. & Strand, Jon, 2013. "Energy Intensive Infrastructure Investments with Retrofits in Continuous Time: Effects of Uncertainty on Energy Use and Carbon Emissions," Memorandum 11/2013, Oslo University, Department of Economics.
  2. Jones, Benjamin & Keen, Michael & Strand, Jon, 2012. "Fiscal implications of climate change," Policy Research Working Paper Series 5956, The World Bank.

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