The Option Value of Investments in Energy-Efficient and Renewable Energy Technologies

This paper takes up the need to engage in substantial investments in the energy producing capital stock to attack the climate change problem, caused by rising carbon dioxide concentrations in the atmosphere. However, the precise magnitudes of economic impacts of global warming as well as abatement and mitigation costs of climate change are not known and may be learned after time. Thus preferences to restrict or to loosen environmental objectives and related emission levels might change and are reflected in an uncertain “price” for environmental usage (e.g. emission tax, marketable permits). As a consequence investors face some uncertainty and need to take the option value of their investments in the energy producing capital stock into account and tend to delay their investment. Considering long usage periods and indivisibilities of power production investments adequate environmental policy has to be designed in a way to reduce uncertainty for investors.