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

Nils Framstad and Jon Strand

No 11/2013, Memorandum from Oslo University, Department of Economics

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 Brownian 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 too high. An initially excessive climate gas emissions level is then likely to be worsened when volatility increases.

Keywords: Greenhouse gas emissions; long-term investments; retrofits; uncertainty; option value of waiting (search for similar items in EconPapers)
JEL-codes: C61 Q54 R42 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-05-16
New Economics Papers: this item is included in nep-ene, nep-env, nep-ppm, nep-reg and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.sv.uio.no/econ/english/research/unpubl ... 013/memo-11-2013.pdf (application/pdf)

Related works:
Journal Article: Energy intensive infrastructure investments with retrofits in continuous time: Effects of uncertainty on energy use and carbon emissions (2015)
Working Paper: Energy intensive infrastructure investments with retrofits in continuous time: effects of uncertainty on energy use and carbon emissions (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:osloec:2013_011

Access Statistics for this paper

More papers in Memorandum from Oslo University, Department of Economics Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by Mari Strønstad Øverås ().