Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions

Energy-intensive infrastructure may tie up fossil energy use and carbon emissions for a long time after investment, and thus be crucial for the ability to control long-run emissions. Much or most of the resulting carbon emissions can often be eliminated later, through a retrofit that may however be...

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Main Authors:	Framstad, Nils Chr., Strand, Jon
Format:	Journal Article
Language:	en_US
Published:	Elsevier 2015
Subjects:	greenhouse gas emissions long-term investments retrofits uncertainty option value of waiting
Online Access:	http://hdl.handle.net/10986/22705

id	okr-10986-22705
recordtype	oai_dc
spelling	okr-10986-227052021-04-23T14:04:10Z Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions Framstad, Nils Chr. Strand, Jon greenhouse gas emissions long-term investments retrofits uncertainty option value of waiting Energy-intensive infrastructure may tie up fossil energy use and carbon emissions for a long time after investment, and thus be crucial for the ability to control long-run emissions. Much or most of the resulting carbon emissions can often be eliminated later, through a retrofit that may however be costly. This paper studies the joint decision to invest in such infrastructure, and retrofit it later, given that future climate damages are uncertain and follow a geometric Brownian motion process with positive drift. We find that higher climate cost volatility (for given unconditional expected costs) then delays the retrofit decision by increasing the option value of waiting to invest. The initial infrastructure is also chosen with higher energy intensity, further increasing total emissions, when volatility is higher. We provide conditions under which higher climate cost volatility increases total expected discounted climate damage from the infrastructure, which happens in a wide set of circumstances. 2015-09-29T17:24:15Z 2015-09-29T17:24:15Z 2015-03-31 Journal Article Resource and Energy Economics 0928-7655 http://hdl.handle.net/10986/22705 en_US CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Elsevier Publications & Research Publications & Research :: Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	en_US
topic	greenhouse gas emissions long-term investments retrofits uncertainty option value of waiting
spellingShingle	greenhouse gas emissions long-term investments retrofits uncertainty option value of waiting Framstad, Nils Chr. Strand, Jon Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions
description	Energy-intensive infrastructure may tie up fossil energy use and carbon emissions for a long time after investment, and thus be crucial for the ability to control long-run emissions. Much or most of the resulting carbon emissions can often be eliminated later, through a retrofit that may however be costly. This paper studies the joint decision to invest in such infrastructure, and retrofit it later, given that future climate damages are uncertain and follow a geometric Brownian motion process with positive drift. We find that higher climate cost volatility (for given unconditional expected costs) then delays the retrofit decision by increasing the option value of waiting to invest. The initial infrastructure is also chosen with higher energy intensity, further increasing total emissions, when volatility is higher. We provide conditions under which higher climate cost volatility increases total expected discounted climate damage from the infrastructure, which happens in a wide set of circumstances.
format	Journal Article
author	Framstad, Nils Chr. Strand, Jon
author_facet	Framstad, Nils Chr. Strand, Jon
author_sort	Framstad, Nils Chr.
title	Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions
title_short	Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions
title_full	Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions
title_fullStr	Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions
title_full_unstemmed	Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions
title_sort	energy intensive infrastructure investments with retrofits in continuous time : effects of uncertainty on energy use and carbon emissions
publisher	Elsevier
publishDate	2015
url	http://hdl.handle.net/10986/22705
_version_	1764451824061906944

Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions

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