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

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 simultaneous decision to invest in such infrastructure, and retrofit it later, in a model where 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 inefficient when they are lower, which is more typical. 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.

Bibliographic Details

Main Authors:	Framstad, Nils Christian, Strand, Jon
Language:	English en_US
Published:	World Bank, Washington, DC 2013-04
Subjects:	ABATEMENT, ABATEMENT COSTS, ABATEMENT POLICIES, AGGREGATE EMISSIONS, ALLOCATION, APPROACH, ATMOSPHERE, AVAILABILITY, BALANCE, CALCULATION, CARBON, CARBON CAPTURE, CARBON EMISSIONS, CARBON EMISSIONS FROM FOSSIL, CARBON PRICES, CDF, CLIMATE, CLIMATE CATASTROPHE, CLIMATE DAMAGES, CLIMATE POLICY, CO2, COAL, CONVERGENCE, COOLING SYSTEMS, COST FUNCTIONS, COST SAVINGS, DIESEL, ECONOMIC DYNAMICS, ELASTICITY, ELECTRIC VEHICLES, EMISSION, EMISSION INTENSITY, EMISSION LEVEL, EMISSION LEVELS, EMISSION RATES, EMISSION REDUCTION, EMISSIONS INTENSITY, EMISSIONS LEVELS, EMISSIONS PATH, EMISSIONS PRICES, EMISSIONS RATES, ENERGY CONSUMPTION, ENERGY COSTS, ENERGY ECONOMICS, ENERGY INTENSITY, ENERGY PRICES, ENERGY SOURCE, ENERGY SUPPLY, ENERGY USE, ENVIRONMENTAL, ENVIRONMENTAL COSTS, ENVIRONMENTAL DAMAGES, ENVIRONMENTAL ECONOMICS, ENVIRONMENTAL POLICY, FOSSIL ENERGY, FOSSIL FUELS, FUEL, FUEL COST, GAS, GAS EMISSIONS, GASOLINE, GHG, GHGS, GLOBAL EMISSIONS, GREENHOUSE, GREENHOUSE GAS, GREENHOUSE GAS EMISSIONS, GREENHOUSE GASES, INCOME, INFRASTRUCTURE COST, INFRASTRUCTURE DEVELOPMENT, INFRASTRUCTURE INVESTMENT, INFRASTRUCTURE PROJECTS, INVESTMENT DECISIONS, IRREVERSIBILITY, LOWER COSTS, MARGINAL COST, MARGINAL COSTS, MODELLING ENERGY, MOTOR VEHICLE, MOTOR VEHICLES, OPTION VALUE, POLICY MAKERS, POLLUTION, POWER, POWER PLANTS, POWER PRODUCTION, PRESENT VALUE, PRIVATE TRANSPORT, PROBABILITY DENSITY, PROBABILITY DISTRIBUTION, PROBABILITY DISTRIBUTIONS, PUBLIC TRANSPORT, PUBLIC TRANSPORT SYSTEMS, REDUCING EMISSIONS, RENEWABLE ENERGY, RENEWABLE ENERGY SOURCES, RETROFIT DECISIONS, RETROFIT OPTION, RETROFITTING, ROAD, ROAD EXPANSION, ROADS, SEQUESTRATION TECHNOLOGIES, STOCHASTIC PROCESS, SUPPLY SIDE, TOTAL EMISSIONS, TRANSPORT, TRANSPORT SYSTEMS, TRUE, UNCERTAINTY ANALYSIS, VALUE OF ENERGY, VEHICLE FLEETS, WIND,
Online Access:	http://documents.worldbank.org/curated/en/2013/04/17648684/energy-intensive-infrastructure-investments-retrofits-continuous-time-effects-uncertainty-energy-use-carbon-emissions https://hdl.handle.net/10986/15572
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