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Quasi-option value and climate policy choices

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  • Ha-Duong, Minh

Abstract

In the climate change issue, the environmental irreversibility (risk of an acceleration of mitigation policies if the worse happen) has to be balanced with the investment irreversibility (risk of over-cautious policies). To explore this balance, we define an option value for a precautionary climate policy. Using the simplest decision-making model, we expose how option value relates to the expected value of future information. Using quantitative data from an integrated as sessment model, we find that most of the times the environmental irreversibility dominates the investment irreversibility. For all cases explored here, the order of magnitude of the option value was significant, about 50% of the opportunity cost.

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File URL: http://www.sciencedirect.com/science/article/pii/S0140-9883(98)00011-5
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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 20 (1998)
Issue (Month): 5-6 (December)
Pages: 599-620

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Handle: RePEc:eee:eneeco:v:20:y:1998:i:5-6:p:599-620
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. Peck, Stephen C. & Teisberg, Thomas J., 1993. "Global warming uncertainties and the value of information: an analysis using CETA," Resource and Energy Economics, Elsevier, vol. 15(1), pages 71-97, March.
  2. Fisher, Anthony C. & Hanemann, W. Michael, 1987. "Quasi-option value: Some misconceptions dispelled," Journal of Environmental Economics and Management, Elsevier, vol. 14(2), pages 183-190, June.
  3. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
  4. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-50, May.
  5. Minh Ha-Duong & Michael Grubb & Jean Charles Hourcade, 1997. "Influence of socioeconomic inertia and uncertainty on optimal CO2-emission abatement," Post-Print halshs-00002452, HAL.
  6. Fisher, Anthony C & Hanemann, W Michael, 1990. "Option Value: Theory and Measurement," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 17(2), pages 167-80.
  7. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
  8. Hourcade, Jean-Charles & Salles, Jean-Michel & Thery, Daniel, 1992. "Ecological economics and scientific controversies. Lessons from some recent policy making in the EEC," Ecological Economics, Elsevier, vol. 6(3), pages 211-233, December.
  9. Kolstad, Charles D., 1994. "George Bush versus Al Gore : Irreversibilities in greenhouse gas accumulation and emission control investment," Energy Policy, Elsevier, vol. 22(9), pages 771-778, September.
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Cited by:

  1. LANGE Andreas & TREICH Nicolas, 2007. "Uncertainty, Learning and Ambiguity in Economic Models on Climate Policy: Some Classical Results and New Directions," LERNA Working Papers 07.16.237, LERNA, University of Toulouse.
  2. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.
  3. Laurent Gilotte & Michel de Lara, 2005. "Precautionary Effect and Variations of the Value of Information," Working Papers 2005.28, Fondazione Eni Enrico Mattei.
  4. Etienne Espagne & Baptiste Perrissin Fabert & Antonin Pottier & Franck Nadaud & Patrice Dumas, 2012. "Disentangling the Stern/Nordhaus Controversy: Beyond the Discounting Clash," Working Papers 2012.61, Fondazione Eni Enrico Mattei.
  5. Sonja Peterson, 2004. "The Contribution of Economics to the Analysis of Climate Change and Uncertainty: A Survey of Approaches and Findings," Kiel Working Papers 1212, Kiel Institute for the World Economy.
  6. Patrice Dumas & Etienne Espagne & Baptiste Perrissin-Fabert & Antonin Pottier, 2012. "Comprehensive Description of RESPONSE," CIRED Working Papers hal-00866414, HAL.
  7. Antonin Pottier & Etienne Espagne & Baptiste Perrissin Fabert & Patrice Dumas, 2015. "The comparative impact of Integrated Assessment Models' structures on optimal mitigation policies," Post-Print hal-01298343, HAL.
  8. Hallegatte, Stephane & Shah, Ankur & Lempert, Robert & Brown, Casey & Gill, Stuart, 2012. "Investment decision making under deep uncertainty -- application to climate change," Policy Research Working Paper Series 6193, The World Bank.
  9. Olivier Godard, 2007. "Climat et générations futures - Un examen critique du débat académique suscité par le Rapport Stern," Working Papers hal-00243059, HAL.
  10. Minh Ha-Duong & Benoit Morel, 2003. "The real option with an absorbing barrier," Post-Print halshs-00003976, HAL.
  11. Strand, Jon & Miller, Sebastian & Siddiqui, Sauleh, 2011. "Infrastructure investments under uncertainty with the possibility of retrofit : theory and simulations," Policy Research Working Paper Series 5516, The World Bank.
  12. Hourcade, Jean-Charles & Salles, Jean-Michel & Thery, Daniel, 1992. "Ecological economics and scientific controversies. Lessons from some recent policy making in the EEC," Ecological Economics, Elsevier, vol. 6(3), pages 211-233, December.
  13. Peterson, Sonja, 2006. "Uncertainty and economic analysis of climate change : a survey of approaches and findings," Open Access Publications from Kiel Institute for the World Economy 3778, Kiel Institute for the World Economy (IfW).
  14. Keller, Klaus & Bolker, Benjamin M. & Bradford, D.F.David F., 2004. "Uncertain climate thresholds and optimal economic growth," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 723-741, July.
  15. Donaghy, Peter & Rolfe, John & Bennett, Jeffrey W., 2004. "Quasi-option values for enhanced information regarding genetically modified foods," 2004 Conference (48th), February 11-13, 2004, Melbourne, Australia 58403, Australian Agricultural and Resource Economics Society.
  16. repec:hal:wpaper:hal-00866414 is not listed on IDEAS
  17. baptiste perrissin fabert & Etienne Espagne & Antonin Pottier & Franck Nadaus, 2012. "Disentangling the Stern/Nordhaus controversy. Why and how do beliefs and modelling choices matter?," EcoMod2012 4270, EcoMod.

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