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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Energy-intensive infrastructure may tie up fossil energy use and carbon emissions for a long time after investments, making the structure of such investments crucial for society. Much or most of the resulting carbon emissions can often be eliminated later, through a costly retrofit. This paper studies the decisions to invest in such infrastructure, and retrofit it later, given that future climate damages are uncertain and follow a geometric Terms of use: Documents inBrownian motion process with positive drift. It shows that greater uncertainty about climate cost (for given unconditional expected costs) then delays the retrofit decision by increasing the option value of waiting to invest. Higher energy intensity is also chosen for the initial infrastructure when uncertainty is greater. These decisions are efficient given that energy and carbon prices facing the decision maker are (globally) correct, but would be inefficient when they are lower, as typical in practice. Greater uncertainty about future climate costs will then further increase lifetime carbon emissions from the infrastructure, related both to initial investments, and to too infrequent retrofits when this emissions level is already toohigh. An initially excessive climate gas emissions level is then likely to be worsened when volatility increases.

The impact of local government investment on the carbon emissions reduction effect: An empirical analysis of panel data from 30 provinces and municipalities in China

“…Mahesh and Jasmin suggest that expanding investment in renewable energy sources on a large scale can effectively reduce emissions and help create a sustainable, low-carbon economy [ 32 ]. Framstad and Strand and Zhang find that investment in infrastructure can impact carbon emissions [ 33 , 34 ]. Lee et al conclude that investment in environmental protection facilitates a low-carbon industrial structure and is helpful in reducing emissions [ 35 ].…”

Marginal abatement cost curves and the quality of emission reductions: a case study on Brazil

“…6, these options are not implemented when short-term target masks the longer-term target. In addition, clean transportation infrastructure also takes a long time to implement, meaning that in the 2030 scenario, it is implemented as fast as possible -confirming the need for short term investment in clean infrastructure, as recently advocated by Waisman et al (2012); Framstad and Strand (2013); Kopp et al (2013); Lecocq and Shalizi (2014) and Avner et al (2014).…”

A Simple GDP-based Model for Public Investments at Risk

“…Bellinger (2016) also provides a thorough review of the issues connected to investment choices, but in a very general way. Other applications of dynamic optimization or variants feature in Purvis, Boggess, Moss and Holt (1995), Framstad (2015), Fisher (2000) and Pindyck (2002).…”