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The Effect of Uncertainty on Pollution Abatement Investments: Measuring Hurdle Rates for Swedish Industry

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  • Katrin Millock

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Céline Nauges

    (LERNA - Economie des Ressources Naturelles - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - INRA - Institut National de la Recherche Agronomique - CEA - Commissariat à l'énergie atomique et aux énergies alternatives)

Abstract

We estimate hurdle rates for firms' investments in pollution abatement technology, using ex post data. The method is based on a structural option value model where the future price of polluting fuel is the major source of uncertainty facing the firm. The empirical procedure is illustrated using a panel of firms from the Swedish pulp and paper industry, and the energy and heating sector, and their sulfur dioxide emissions over the period 2000-2003. The results indicate that hurdle rates of investment vary from 2.7 to 3.1 in the pulp and paper industry, and from 3.4 to 3.6 in the energy and heating sector depending on econometric specification.

Suggested Citation

  • Katrin Millock & Céline Nauges, 2008. "The Effect of Uncertainty on Pollution Abatement Investments: Measuring Hurdle Rates for Swedish Industry," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00343702, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00343702
    DOI: 10.1016/j.reseneeco.2008.09.002
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00343702v1
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    1. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2025. "Assessing the Energy-Efficiency Gap," World Scientific Book Chapters, in: Economics of Environment, Climate Change, and Wine Selected Papers of Robert N Stavins Volume 3 (2011–2023), chapter 4, pages 53-118, World Scientific Publishing Co. Pte. Ltd..
    2. Bostian, Moriah & Färe, Rolf & Grosskopf, Shawna & Lundgren, Tommy, 2016. "Environmental investment and firm performance: A network approach," Energy Economics, Elsevier, vol. 57(C), pages 243-255.
    3. Botta, Enrico, 2019. "An experimental approach to climate finance: the impact of auction design and policy uncertainty on renewable energy equity costs in Europe," Energy Policy, Elsevier, vol. 133(C).
    4. Löfgren, Åsa & Burtraw, Dallas & Keyes, Amelia, 2020. "Decarbonizing the Industrial Sector: The Potential for Ambitious EU Member States to Use Flexible Performance Standards to Strengthen Carbon Price Signals," RFF Reports 20-03, Resources for the Future.
    5. Jurate Jaraite & Andrius Kazukauskas & Tommy Lundgren, 2014. "The effects of climate policy on environmental expenditure and investment: evidence from Sweden," Journal of Environmental Economics and Policy, Taylor & Francis Journals, vol. 3(2), pages 148-166, July.
    6. Hammar, Henrik & Löfgren, Åsa, 2010. "Explaining adoption of end of pipe solutions and clean technologies--Determinants of firms' investments for reducing emissions to air in four sectors in Sweden," Energy Policy, Elsevier, vol. 38(7), pages 3644-3651, July.

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