Stepwise Investment in Circular Plastics Under the Presence of Policy Uncertainty

Loïc Weerdt (), Tine Compernolle (), Verena Hagspiel (), Peter Kort and Carlos Oliveira ()
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Loïc Weerdt: Princeton University
Tine Compernolle: University of Antwerp
Verena Hagspiel: Norwegian University of Science and Technology
Carlos Oliveira: Universidade de Lisboa and REM

Environmental & Resource Economics, 2022, vol. 83, issue 2, No 6, 413-443

Abstract: Abstract The use of recycled plastics is critical in the transition to a circular economy. However, for certain types of plastics, the recycling process is economically unviable. Government-driven incentives, such as a policy imposing a minimum fraction of recycled plastics to be used in production processes of plastic goods, offer an exit from this impasse. In this paper, we study how a firm’s investment behavior is affected by policy uncertainty governing the introduction of such a regulatory measure. Specifically, we adopt a real option approach to study the two-step investment of a firm in its transition to the use of recycled plastics. A clear trade-off can be distinguished. On the one hand, investing early causes unnecessary profit losses before the policy implementation. On the other hand, a lack of investment leads to market exclusion after the policy implementation. For our case study on the use of recycled polyethylene, we find that firms plan their first investment step, so that the timing of the second investment step approximates their projection on the policy implementation time. Moreover, we find that the firm’s value is maximized when the capacity of the first investment is smaller than the capacity of the second investment.

Keywords: Circular economy; Real option analysis; Recycled plastics; Policy uncertainty; Public pressure; Stepwise investment (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10640-021-00619-0

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