Option value in low-carbon technology policies

Guy Meunier and Dominique Finon

Climate Policy, 2013, vol. 13, issue 1, 1-19

Abstract: The political dilemma presented by the deployment of large-size low-carbon technologies (LCTs) is analysed using a simple dynamic model to investigate the relation between irreversible investments and learning-by-doing within a context of exogeneous uncertainty about the carbon price. It is shown that in some cases when information about the future carbon price is expected, the irreversibility effect holds and fewer LCT plants should be developed. In other cases, this result is reversed, and acquiring information can justify the early deployment of LCT. In particular, marginal reasoning is limited when learning-by-doing, and more generally endogenous technical change, is considered. When acquiring information is expected, the optimal policy can move from a corner optimum with no LCT deployment to an interior optimum with a strictly positive development.

Date: 2013
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DOI: 10.1080/14693062.2012.699787

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