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A Real Options Approach to Abatement Investments and Green Goodwill

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  • Tommy Lundgren

Abstract

In this paper we adopt the green goodwill argument as to why firms voluntarily invest in abatement capital. We investigate the effects on the abatement investment decision of changes in uncertainty about future green goodwill, competitor abatement investments, regulations, etc., using a real options framework. Our results indicate that increased uncertainty about consumers' willingness to pay for “green” products in the future discourage voluntary abatement investments. The model also suggests that voluntary abatement investments are promoted by an increased threat of regulation and competitor abatement investments. Furthermore, the benefit-cost ratio of the abatement investment project, at the point where it is optimal to invest, is independent of what regulatory regime (stringent or lenient) the firm operates in. We also conclude that despite the fact that voluntary abatement investment exists, there may still be room for environmental policy. Copyright Kluwer Academic Publishers 2003

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  • Tommy Lundgren, 2003. "A Real Options Approach to Abatement Investments and Green Goodwill," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(1), pages 17-31, May.
    • Handle: RePEc:kap:enreec:v:25:y:2003:i:1:p:17-31
    DOI: 10.1023/A:1023602426857
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    References listed on IDEAS

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