Dynamic Investment under Transition Uncertainty: A Five-Channel Policy Framework for Clean Technology

Sake Saakstra

MPRA Paper from University Library of Munich, Germany

Abstract: Clean-technology investment under policy-regime transition exhibits a structure that the canonical real-options framework characterises only partially. We develop a dynamic-investment model in which an irreversible project decision is taken sequentially across four lifecycle stages (front-end design, final investment decision, construction, operations) under two sources of stochastic variation: the payoff-determining state variable (e.g. carbon price, technology cost) and the policy-regime credibility belief that determines whether the policy environment will persist over the investment horizon. The optimal cancellation policy is characterised by stage-dependent thresholds that respond to five comparative-statics channels: the expected-return channel, the uncertainty channel, the timing/option-value channel, the coordination channel, and the implementation-cost channel. The policy-credibility extension delivers a formal proposition that the optimal threshold is monotonically decreasing in policy-credibility belief whenever the policy-conditional payoff exceeds the regime-reversal baseline. The framework's primary contribution is methodological discipline: each of the five channels is matched to a pre-registered falsifiability criterion that specifies, in advance of empirical testing, both the observable implication and the numerical threshold at which the channel hypothesis would be rejected. This disciplinary structure addresses a long-standing concern in mechanism-based empirical research that mechanisms can be formulated ex-post to rationalise observed patterns. Eighteen mechanism predictions are catalogued, of which fourteen would be classified as confirmed, two as partial, and two as falsified against existing empirical evidence from related clean-hydrogen investment research. The two falsifications - the EU Innovation Fund capex-grant null and the EU Carbon Border Adjustment Mechanism transitional-phase null - are themselves substantive contributions to the literature on policy-design effectiveness, identifying which frictions are binding in the contemporary capital-abundant clean-technology environment. The framework is sector-agnostic and applies to any clean-technology investment context with sufficient sample size, regime-transition observation, and project-level data on cancellation events. The implications for the design of clean-technology policy portfolios are explicit: multi-friction-addressing instruments dominate single-friction high-magnitude instruments; credibility-anchoring instruments substitute for direct payoff transfers; and capex-grant instruments without offtake-commitment requirements are predicted to fail under the prevailing contemporary environment.

Keywords: real options; irreversible investment; policy uncertainty; transition risk; mechanism design; clean technology; pre-registered falsifiability; comparative statics (search for similar items in EconPapers)
JEL-codes: D81 D89 G31 Q42 Q48 Q49 (search for similar items in EconPapers)
Date: 2028-05-28
References: Add references at CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/129310/1/MPRA_paper_129310.pdf original version (application/pdf)

Related works:
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:pra:mprapa:129310

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().