Option values of low carbon technology policies: how to combine irreversibility effects and learning-by-doing in decisions

Dominique Finon and Guy Meunier

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: In this paper, the political dilemma of the deployment of a large-size low carbon technology (LCT) is analyzed. A simple dynamic model is developed to analyze the interrelation between irreversible investments and learning-by-doing within a context of exogenous uncertainty on carbon price. Contrasting results are obtained. In some cases, the usual irreversibility effects hold, fewer plants of the LCT should be developed when information is anticipated. In other cases, this result is reversed and information arrival can justify an early deployment of the LCT. More precisely, it is shown that marginal reasoning is limited when learning by-doing, and more generally endogenous technical change, is considered. When information arrival is anticipated the optimal policy can move from a corner optimum with no LCT deployment to an interior optimum with a strictly positive development.

Keywords: investment; option value; learning-by-doing (search for similar items in EconPapers)
JEL-codes: D83 O33 Q55 (search for similar items in EconPapers)
Date: 2012-06-19
New Economics Papers: this item is included in nep-ene and nep-env
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Working Paper: Option values of low carbon technology policies: how to combine irreversibility effects and learning-by-doing in decisions (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1231

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