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Using ex post data to estimate the hurdle rate of abatement investments - an application to sulfur emissions from the Swedish pulp and paper industry and energy sector

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Abstract

We propose a method for estimating 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 econometric procedure is illustrated using a panel of firms from the Swedish pulp and paper industry, and the energy and heating sector from 2000 to 2003. The results indicate a hurdle rate of investment of 2.9 in the pulp and paper industry and 3.4 in the energy and heating sector.

Suggested Citation

  • Åsa Löfgren & Katrin Millock & Céline Nauges, 2008. "Using ex post data to estimate the hurdle rate of abatement investments - an application to sulfur emissions from the Swedish pulp and paper industry and energy sector," Documents de travail du Centre d'Economie de la Sorbonne v08017, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:v08017
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    Keywords

    Option value; fuel price uncertainty; investment decision; pollution abatement; panel data; pulp and paper industry; energy and heating sector.;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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