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Decision Frameworks and the Investment in R&D

Author

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  • Erin Baker

    (Department of Mechanical and Industrial Engineering, College of Engineering, University of Massachusetts, Amherst, MA)

  • Olaitan Olaleye

    (Department of Mechanical and Industrial Engineering, College of Engineering, University of Massachusetts, Amherst, MA)

  • Lara Aleluia Reis

    (Centro Euro-Mediterraneo per i Cambiamenti Climatici, Fondazione Eni Enrico Mattei (FEEM))

Abstract

In this paper we provide an overview of decision frameworks aimed at crafting an energy technology Research & Development portfolio, based on the results of three large expert elicitation studies and a large scale energy-economic model. We introduce importance sampling as a technique for integrating elicitation data and large IAMs into decision making under uncertainty models. We show that it is important to include both parts of this equation – the prospects for technological advancement and the interactions of the technologies in and with the economy. We find that investment in energy technology R&D is important even in the absence of climate policy. We illustrate the value of considering dynamic two-stage sequential decision models under uncertainty for identifying alternatives with option value. Finally, we consider two frameworks that incorporate ambiguity aversion. We suggest that these results may be best used to guide future research aimed at improving the set of elicitation data.

Suggested Citation

  • Erin Baker & Olaitan Olaleye & Lara Aleluia Reis, 2015. "Decision Frameworks and the Investment in R&D," Working Papers 2015.42, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2015.42
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    Cited by:

    1. Bosetti, Valentina & Marangoni, Giacomo & Borgonovo, Emanuele & Diaz Anadon, Laura & Barron, Robert & McJeon, Haewon C. & Politis, Savvas & Friley, Paul, 2015. "Sensitivity to energy technology costs: A multi-model comparison analysis," Energy Policy, Elsevier, vol. 80(C), pages 244-263.
    2. Bistline, John E., 2016. "Energy technology R&D portfolio management: Modeling uncertain returns and market diffusion," Applied Energy, Elsevier, vol. 183(C), pages 1181-1196.
    3. Baker, Erin & Bosetti, Valentina & Salo, Ahti, 2020. "Robust portfolio decision analysis: An application to the energy research and development portfolio problem," European Journal of Operational Research, Elsevier, vol. 284(3), pages 1107-1120.
    4. Milford, James & Henrion, Max & Hunter, Chad & Newes, Emily & Hughes, Caroline & Baldwin, Samuel F., 2022. "Energy sector portfolio analysis with uncertainty," Applied Energy, Elsevier, vol. 306(PA).

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    More about this item

    Keywords

    Decision Making Under Uncertainty; Climate Change; Stabilization Pathways; Energy technology; Ambiguity Aversion;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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