Mitigating global warming: a real options approach

Abstract

Le Centre interuniversitaire de recherche en économie quantitative (CIREQ) regroupe des chercheurs dans les domaines de l'économétrie, la théorie de la décision, la macroéconomie et les marchés financiers, la microéconomie appliquée ainsi que l'économie de l'environnement et des ressources naturelles. Ils proviennent principalement des universités de Montréal, McGill et Concordia. Le CIREQ offre un milieu dynamique de recherche en économie quantitative grâce au grand nombre d'activités qu'il organise (séminaires, ateliers, colloques) et de collaborateurs qu'il reçoit chaque année. AbstractMitigation and adaptation represent two solutions to the issue of global warming. While mitigation aims at reducing CO 2 emissions and preventing climate change, adaptation encompasses a broad scope of techniques used to reduce the impacts of climate change once they have occurred. Both have direct costs on a country's Gross Domestic Product, but costs also arise from temperature increases due to inaction. This paper introduces a tipping point in a real options model and analyzes optimal investment choices in mitigation and their timing.

Investing in climate change adaptation and mitigation: A methodological review of real-options studies

“…Studies on climate change mitigation seldom consider the effect of climatic uncertainty on investment decisions. Chesney et al ( 2017 ) incorporated climatic uncertainty into mitigation investment decisions at the global level. They modelled global temperature dynamics using a GBM process and considered scenarios for baseline, moderate and severe warming or drying climates to simulate the green investment in biomass and wheat production.…”

“…Furthermore, many required investments are costly and irreversible. Uncertainty, in combination with irreversible investments, provides incentives to delay investments since waiting is valuable as it allows for the acquisition of information on future prospects (see e.g., Schou et al 2015 ; Chesney et al 2017 ; Hauer et al 2017 ).…”

“…The optimal timing and magnitude of actions are crucial when it comes to investment strategies coping with climate change under uncertainty, as illustrated by Watkiss et al ( 2015 ), Abadie et al ( 2017 ) and Chesney et al ( 2017 ). The traditional Net Present Value (NPV, hereafter) criterion is problematic since it does not account for the value of the option to wait, a value that is implicitly lost once an investment is made.…”

Climate Games: Who’s on First? What’s on Second?

“…A developing literature uses more sophisticated approaches, in particular by depicting optimal choices in fully dynamic models with explicit characterization of uncertainty in key state variables. Chesney, Lasserre and Troja (2017) examine optimal climate policies when temperature is stochastic and there is a known temperature threshold which will cause disastrous consequences if exceeded for a prolonged period of time. Other recent papers which incorporate stochasticity into one or more state variables include Crost and Traeger (2014); Ackerman, Stanton and Bueno (2013); Traeger (2014); Hambel, Kraft and Schwartz (2017).…”

Numéro Spécial À La Mémoire De Pierre Lasserre

“…À travers ses recherches sur les choix de différentes alternatives de l'exploitation de ressources, Pierre Lasserre a développé et appliqué des outils de la théorie des options réelles (Kassar et Lasserre, 2004;Morgan et al, 2008;Ben Abdallah et Lasserre, 2012, 2016. Dans un article récent (Chesney et al, 2017), il étudie l'arbitrage entre les solutions de mitigation et d'adaptation pour faire face aux changements climatiques. Il a également contribué à des travaux importants sur le problème d'antisélection (Dionne et Lasserre, 1985, 1987, la réglementation avec asymétrie d'information (Gaudet et Lasserre, 2015) et l'apprentissage endogène, notamment dans le cas de traitement antirétroviraux pour les patients atteints du VIH (Lasserre et al, 2006).…”