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Option values of low carbon technology policies: how to combine irreversibility effects and learning-by-doing in decisions

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  • Finon, D.
  • Meunier, G.

Abstract

In this paper, the political dilemma of the deployment of a large-size low carbon technology (LCT) is analyzed. A simple dynamic model is developed to analyze the interrelation between irreversible investments and learning-by-doing within a context of exogenous uncertainty on carbon price. Contrasting results are obtained. In some cases, the usual irreversibility effects hold, fewer plants of the LCT should be developed when information is anticipated. In other cases, this result is reversed and information arrival can justify an early deployment of the LCT. More precisely, it is shown that marginal reasoning is limited when learning by-doing, and more generally endogenous technical change, is considered. When information arrival is anticipated the optimal policy can move from a corner optimum with no LCT deployment to an interior optimum with a strictly positive development.

Suggested Citation

  • Finon, D. & Meunier, G., 2012. "Option values of low carbon technology policies: how to combine irreversibility effects and learning-by-doing in decisions," Cambridge Working Papers in Economics 1231, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1231
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    More about this item

    Keywords

    investment; option value; learning-by-doing;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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