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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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  • Ha-Duong, Minh, 1998. "Quasi-option value and climate policy choices," Energy Economics, Elsevier, vol. 20(5-6), pages 599-620, December.
    • Handle: RePEc:eee:eneeco:v:20:y:1998:i:5-6:p:599-620
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    3. 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.
    4. 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, Springer;European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.
    5. Laurent Gilotte & Michel de Lara, 2005. "Precautionary Effect and Variations of the Value of Information," Working Papers 2005.28, Fondazione Eni Enrico Mattei.
    6. Baptiste Perrissin Fabert & Etienne Espagne & Antonin Pottier & Patrice Dumas, 2014. "The Comparative Impact of Integrated Assessment Models' Structures on Optimal Mitigation Policies," Working Papers 2014.58, Fondazione Eni Enrico Mattei.
    7. 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.
    8. 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.
    9. 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 Kiel).
    10. Katrin Millock, 1999. "Endogenous Monitoring: a New Challenge for the Regulation of Energy Externalities," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 68(4), pages 635-646.
    11. Patrice Dumas & Etienne Espagne & Baptiste Perrissin-Fabert & Antonin Pottier, 2012. "Comprehensive Description of RESPONSE," Working Papers hal-00866414, HAL.
    12. Mort Webster, 2008. "Incorporating Path Dependency into Decision-Analytic Methods: An Application to Global Climate-Change Policy," Decision Analysis, INFORMS, vol. 5(2), pages 60-75, June.
    13. Graeme Guthrie, 2021. "Discounting, Disagreement, and the Option to Delay," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(1), pages 95-133, September.
    14. 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.
    15. Peterson, Sonja, 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 (IfW Kiel).
    16. 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.
    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.
    18. Olivier Godard, 2007. "Climat et générations futures - Un examen critique du débat académique suscité par le Rapport Stern," Working Papers hal-00243059, HAL.
    19. Strand, Jon & Miller, Sebastian & Siddiqui, Sauleh, 2014. "Long-run carbon emission implications of energy-intensive infrastructure investments with a retrofit option," Energy Economics, Elsevier, vol. 46(C), pages 308-317.
    20. Minh Ha-Duong & Benoit Morel, 2003. "The real option with an absorbing barrier," Post-Print halshs-00003976, HAL.
    21. Kalra, Nidhi & Hallegatte, Stephane & Lempert, Robert & Brown, Casey & Fozzard, Adrian & Gill, Stuart & Shah, Ankur, 2014. "Agreeing on robust decisions : new processes for decision making under deep uncertainty," Policy Research Working Paper Series 6906, The World Bank.
    22. Henri de Groot, 2001. "On the optimal timing of reductions of CO2 emissions; an economists' perspective on the debate on "when flexibility"," CPB Discussion Paper 1.rdf, CPB Netherlands Bureau for Economic Policy Analysis.

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