On the option to invest in pollution control under a regime of tradable emissions allowances

Margaret Insley

Canadian Journal of Economics, 2003, vol. 36, issue 4, 860-883

Abstract: Optimal decisions of a firm facing the option of retrofitting its plant to reduce pollution and thereby eliminate the need to purchase emissions allowances are analysed. The decision is treated as a real option with the price of pollution permits following a known stochastic process. The model is formulated as a set of one-dimensional partial differential equations. At discrete points in time, the firm owner makes optimal decisions about the retrofit, including whether to mothball temporarily. The model is used to analyse a firm's decision to instal a scrubber as a result of the 1990 U.S. Clean Air Act.

JEL-codes: D81 G31 Q25 (search for similar items in EconPapers)
Date: 2003
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