IDEAS home Printed from https://ideas.repec.org/a/eee/resene/v41y2015icp1-18.html
   My bibliography  Save this article

Energy intensive infrastructure investments with retrofits in continuous time: Effects of uncertainty on energy use and carbon emissions

Author

Listed:
  • Framstad, Nils Chr.
  • Strand, Jon

Abstract

Energy-intensive infrastructure may tie up fossil energy use and carbon emissions for a long time after investment, and thus be crucial for the ability to control long-run emissions. Much or most of the resulting carbon emissions can often be eliminated later, through a retrofit that may however be costly. This paper studies the joint decision to invest in such infrastructure, and retrofit it later, given that future climate damages are uncertain and follow a geometric Brownian motion process with positive drift. We find that higher climate cost volatility (for given unconditional expected costs) then delays the retrofit decision by increasing the option value of waiting to invest. The initial infrastructure is also chosen with higher energy intensity, further increasing total emissions, when volatility is higher. We provide conditions under which higher climate cost volatility increases total expected discounted climate damage from the infrastructure, which happens in a wide set of circumstances.

Suggested Citation

  • Framstad, Nils Chr. & Strand, Jon, 2015. "Energy intensive infrastructure investments with retrofits in continuous time: Effects of uncertainty on energy use and carbon emissions," Resource and Energy Economics, Elsevier, vol. 41(C), pages 1-18.
  • Handle: RePEc:eee:resene:v:41:y:2015:i:c:p:1-18
    DOI: 10.1016/j.reseneeco.2015.03.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0928765515000184
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Vogt-Schilb, Adrien & Meunier, Guy & Hallegatte, Stephane, 2012. "How inertia and limited potentials affect the timing of sectoral abatements in optimal climate policy," Policy Research Working Paper Series 6154, The World Bank.
    2. Adrien Vogt-Schilb & St├ęphane Hallegatte & Christophe De Gouvello, 2014. "Marginal Abatement Cost Curves and Quality of Emission Reductions: A Case Study on Brazil," Post-Print hal-00966821, HAL.
    3. Framstad, N.C., 2011. "A remark on R.S. Pindyck: "Irreversibilities and the timing of environmental policy"," Resource and Energy Economics, Elsevier, vol. 33(3), pages 756-760, September.
    4. Anas, Alex & Timilsina, Govinda R., 2009. "Lock-in effects of road expansion on CO2 emissions : results from a core-periphery model of Beijing," Policy Research Working Paper Series 5017, The World Bank.
    5. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
    6. Pindyck, Robert S., 2002. "Optimal timing problems in environmental economics," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1677-1697, August.
    7. Vogt-Schilb, Adrien & Hallegatte, Stephane & de Gouvello Christophe, 2014. "Long-term mitigation strategies and marginal abatement cost curves : a case study on Brazil," Policy Research Working Paper Series 6808, The World Bank.
    8. Strand, Jon & Miller, Sebastian, 2010. "Climate cost uncertainty, retrofit cost uncertainty, and infrastructure closedown : a framework for analysis," Policy Research Working Paper Series 5208, The World Bank.
    9. Strand, Jon, 2014. "Implications of a lowered damage trajectory for mitigation in a continuous-time stochastic model," Energy Economics, Elsevier, vol. 42(C), pages 43-49.
    10. 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.
    11. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, December.
    12. Framstad, Nils Chr., 2013. "When can environmental profile and emissions reductions be optimized independently of the pollutant level?," Memorandum 12/2013, Oslo University, Department of Economics.
    13. 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.
    14. Balikcioglu, Metin & Fackler, Paul L. & Pindyck, Robert S., 2011. "Solving optimal timing problems in environmental economics," Resource and Energy Economics, Elsevier, vol. 33(3), pages 761-768, September.
    15. Nils Chr. Framstad, 2014. "When can the environmental profile and emissions reduction be optimised independently of the pollutant level?," Journal of Environmental Economics and Policy, Taylor & Francis Journals, vol. 3(1), pages 25-45, March.
    16. Guy Meunier & Dominique Finon, 2013. "Option value in low-carbon technology policies," Climate Policy, Taylor & Francis Journals, vol. 13(1), pages 1-19, January.
    17. Franck Lecocq & Zmarak Shalizi, 2014. "The economics of targeted mitigation in infrastructure," Climate Policy, Taylor & Francis Journals, vol. 14(2), pages 187-208, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Strand, Jon, 2014. "Implications of a lowered damage trajectory for mitigation in a continuous-time stochastic model," Energy Economics, Elsevier, vol. 42(C), pages 43-49.
    2. Framstad, Nils Chr., 2013. "When can environmental profile and emissions reductions be optimized independently of the pollutant level?," Memorandum 12/2013, Oslo University, Department of Economics.
    3. Nils Chr. Framstad, 2014. "When can the environmental profile and emissions reduction be optimised independently of the pollutant level?," Journal of Environmental Economics and Policy, Taylor & Francis Journals, vol. 3(1), pages 25-45, March.
    4. Bernard Lapeyre & Emile Quinet, 2017. "A Simple GDP-based Model for Public Investments at Risk," Post-Print hal-01666574, HAL.
    5. Chiu, Yi-Bin, 2017. "Carbon dioxide, income and energy: Evidence from a non-linear model," Energy Economics, Elsevier, vol. 61(C), pages 279-288.

    More about this item

    Keywords

    Greenhouse gas emissions; Long-term investments; Retrofits; Uncertainty; Option value of waiting;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:resene:v:41:y:2015:i:c:p:1-18. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/505569 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.