IDEAS home Printed from https://ideas.repec.org/p/hal/journl/halshs-00343702.html
   My bibliography  Save this paper

The Effect of Uncertainty on Pollution Abatement Investments: Measuring Hurdle Rates for Swedish Industry

Author

Listed:
  • Katrin Millock

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Céline Nauges

    (LERNA - Economie des Ressources Naturelles - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - CEA - Commissariat à l'énergie atomique et aux énergies alternatives)

Abstract

We estimate hurdle rates for firms' investments in pollution abatement technology, using ex post data. The method is based on a structural option value model where the future price of polluting fuel is the major source of uncertainty facing the firm. The empirical procedure is illustrated using a panel of firms from the Swedish pulp and paper industry, and the energy and heating sector, and their sulfur dioxide emissions over the period 2000-2003. The results indicate that hurdle rates of investment vary from 2.7 to 3.1 in the pulp and paper industry, and from 3.4 to 3.6 in the energy and heating sector depending on econometric specification.

Suggested Citation

  • Katrin Millock & Céline Nauges, 2008. "The Effect of Uncertainty on Pollution Abatement Investments: Measuring Hurdle Rates for Swedish Industry," Post-Print halshs-00343702, HAL.
  • Handle: RePEc:hal:journl:halshs-00343702
    DOI: 10.1016/j.reseneeco.2008.09.002
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00343702
    as

    Download full text from publisher

    File URL: https://shs.hal.science/halshs-00343702/document
    Download Restriction: no

    File URL: https://libkey.io/10.1016/j.reseneeco.2008.09.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Harchaoui, Tarek M & Lasserre, Pierre, 2001. "Testing the Option Value Theory of Irreversible Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 141-166, February.
    2. Berck, Peter & Roberts, Michael, 1996. "Natural Resource Prices: Will They Ever Turn Up?," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 65-78, July.
    3. Lee, Junsoo & List, John A. & Strazicich, Mark C., 2006. "Non-renewable resource prices: Deterministic or stochastic trends?," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 354-370, May.
    4. Khanna, Madhu & Zilberman, David, 1997. "Incentives, precision technology and environmental protection," Ecological Economics, Elsevier, vol. 23(1), pages 25-43, October.
    5. Slade, Margaret E., 1988. "Grade selection under uncertainty: Least cost last and other anomalies," Journal of Environmental Economics and Management, Elsevier, vol. 15(2), pages 189-205, June.
    6. Margaret Insley, 2003. "On the option to invest in pollution control under a regime of tradable emissions allowances," Canadian Journal of Economics, Canadian Economics Association, vol. 36(4), pages 860-883, November.
    7. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
    8. Ronald J. Sutherland, 1991. "Market Barriers to Energy-Efficiency Investments," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 15-34.
    9. G. Bethuyne, 2002. "The Timing of Technology Adoption by a Cost-minimizing Firm," Journal of Economics, Springer, vol. 76(2), pages 123-154, June.
    10. Pindyck, Robert S., 2002. "Optimal timing problems in environmental economics," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1677-1697, August.
    11. Östblom, Göran, 2009. "Nitrogen and sulphur outcomes of a carbon emissions target excluding traded allowances -- The Swedish case 2020," Ecological Economics, Elsevier, vol. 68(8-9), pages 2382-2389, June.
    12. Khanna, Madhu & Isik, Murat & Winter-Nelson, Alex, 2000. "Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy," Agricultural Economics, Blackwell, vol. 24(1), pages 9-21, December.
    13. Isik, Murat & Khanna, Madhu & Winter-Nelson, Alex, 2000. "Sequential Investment In Site-Specific Crop Management Under Output Price Uncertainty: Implications For Nitrogen Pollution Control," 2000 Annual meeting, July 30-August 2, Tampa, FL 21875, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    14. Bruce Larson & George Frisvold, 1996. "Uncertainty over future environmental taxes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 8(4), pages 461-471, December.
    15. Amy Purvis & William G. Boggess & Charles B. Moss & John Holt, 1995. "Technology Adoption Decisions under Irreversibility and Uncertainty: An Ex Ante Appproach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(3), pages 541-551.
    16. Diansheng Dong & Atanu Saha, 1998. "He came, he saw, (and) he waited: an empirical analysis of inertia in technology adoption," Applied Economics, Taylor & Francis Journals, vol. 30(7), pages 893-905.
    17. Sarkar, Sudipto, 2003. "The effect of mean reversion on investment under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 377-396, November.
    18. Postali, Fernando A.S. & Picchetti, Paulo, 2006. "Geometric Brownian Motion and structural breaks in oil prices: A quantitative analysis," Energy Economics, Elsevier, vol. 28(4), pages 506-522, July.
    19. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
    20. Henrik Hammar & Asa Lofgren, 2001. "The Determinants of Sulfur Emissions from Oil Consumption in Swedish Manufacturing Industry, 1976-1995," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 107-126.
    21. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    22. Robert S. Pindyck, 1999. "The Long-Run Evolutions of Energy Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-27.
    23. Östblom, Göran, 2007. "Nitrogen and Sulphur Outcomes of a Carbon Emissions Target Excluding Traded Allowances - An Input-Output Analysis of the Swedish Case," Working Papers 101, National Institute of Economic Research.
    24. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
    25. Metcalf, Gilbert E. & Hassett, Kevin A., 1995. "Investment under alternative return assumptions Comparing random walks and mean reversion," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1471-1488, November.
    26. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    27. Gale A. Boyd & Stephen H. Karlson, 1993. "The Impact of Energy Prices on Technology Choice in the United States Steel Industry," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 47-56.
    28. Leigh J. Maynard & James S. Shortle, 2001. "Determinants of Cleaner Technology Investments in the U.S. Bleached Kraft Pulp Industry," Land Economics, University of Wisconsin Press, vol. 77(4), pages 561-576.
    29. Janis M. Carey & David Zilberman, 2002. "A Model of Investment under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 171-183.
    30. Daan van Soest & Erwin Bulte, 2001. "Does the Energy-Efficiency Paradox Exist? Technological Progress and Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 18(1), pages 101-112, January.
    31. Richards, Timothy J., 1996. "Economic Hysteresis And The Effects Of Output Regulation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(1), pages 1-17, July.
    32. Ahrens, W. Ashley & Sharma, Vijaya R., 1997. "Trends in Natural Resource Commodity Prices: Deterministic or Stochastic?," Journal of Environmental Economics and Management, Elsevier, vol. 33(1), pages 59-74, May.
    33. Hassett, Kevin A. & Metcalf, Gilbert E., 1995. "Energy tax credits and residential conservation investment: Evidence from panel data," Journal of Public Economics, Elsevier, vol. 57(2), pages 201-217, June.
    34. Paul Diederen & Frank van Tongeren & Hennie van der Veen, 2003. "Returns on Investments in Energy-saving Technologies Under Energy Price Uncertainty in Dutch Greenhouse Horticulture," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 24(4), pages 379-394, April.
    35. Jaffe, Adam B. & Stavins, Robert N., 1994. "The energy-efficiency gap What does it mean?," Energy Policy, Elsevier, vol. 22(10), pages 804-810, October.
    36. Murat Isik, 2004. "Incentives for Technology Adoption Under Environmental Policy Uncertainty: Implications for Green Payment Programs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 27(3), pages 247-263, March.
    37. Murat Isik, 2006. "Implications of alternative stochastic processes for investment in agricultural technologies," Applied Economics Letters, Taylor & Francis Journals, vol. 13(1), pages 21-27.
    38. Hassett, Kevin A. & Metcalf, Gilbert E., 1993. "Energy conservation investment : Do consumers discount the future correctly?," Energy Policy, Elsevier, vol. 21(6), pages 710-716, June.
    39. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2017. "Assessing the Energy-Efficiency Gap," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1486-1525, December.
    2. Bostian, Moriah & Färe, Rolf & Grosskopf, Shawna & Lundgren, Tommy, 2016. "Environmental investment and firm performance: A network approach," Energy Economics, Elsevier, vol. 57(C), pages 243-255.
    3. Botta, Enrico, 2019. "An experimental approach to climate finance: the impact of auction design and policy uncertainty on renewable energy equity costs in Europe," Energy Policy, Elsevier, vol. 133(C).
    4. Jurate Jaraite & Andrius Kazukauskas & Tommy Lundgren, 2014. "The effects of climate policy on environmental expenditure and investment: evidence from Sweden," Journal of Environmental Economics and Policy, Taylor & Francis Journals, vol. 3(2), pages 148-166, July.
    5. Hammar, Henrik & Löfgren, Åsa, 2010. "Explaining adoption of end of pipe solutions and clean technologies--Determinants of firms' investments for reducing emissions to air in four sectors in Sweden," Energy Policy, Elsevier, vol. 38(7), pages 3644-3651, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. LOFGREN Asa & MILLOCK Katrin & NAUGES Céline, 2007. "Using Ex Post Data to Estimate the Hurdle Rate of Abatement Investments - An application to the Swedish Pulp and Paper Industry and Energy Sector," LERNA Working Papers 07.06.227, LERNA, University of Toulouse.
    2. Åsa Löfgren & Katrin Millock & Céline Nauges, 2008. "Using ex post data to estimate the hurdle rate of abatement investments - an application to sulfur emissions from the Swedish pulp and paper industry and energy sector," Documents de travail du Centre d'Economie de la Sorbonne v08017, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Hammar, Henrik & Löfgren, Åsa, 2010. "Explaining adoption of end of pipe solutions and clean technologies--Determinants of firms' investments for reducing emissions to air in four sectors in Sweden," Energy Policy, Elsevier, vol. 38(7), pages 3644-3651, July.
    4. Li, Shoude, 2013. "Emission permit banking, pollution abatement and production–inventory control of the firm," International Journal of Production Economics, Elsevier, vol. 146(2), pages 679-685.
    5. Hammar, Henrik & Löfgren, Åsa, 2007. "Explaining adoption of end of pipe solutions and clean technologies," Working Papers 102, National Institute of Economic Research.
    6. Schleich, Joachim & Gassmann, Xavier & Faure, Corinne & Meissner, Thomas, 2016. "Making the implicit explicit: A look inside the implicit discount rate," Energy Policy, Elsevier, vol. 97(C), pages 321-331.
    7. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2017. "Assessing the Energy-Efficiency Gap," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1486-1525, December.
    8. Häckel, Björn & Pfosser, Stefan & Tränkler, Timm, 2017. "Explaining the energy efficiency gap - Expected Utility Theory versus Cumulative Prospect Theory," Energy Policy, Elsevier, vol. 111(C), pages 414-426.
    9. Ghoshray, A., 2018. "The Dynamic Properties of Natural Resource Prices," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277210, International Association of Agricultural Economists.
    10. Shafiee, Shahriar & Topal, Erkan, 2010. "A long-term view of worldwide fossil fuel prices," Applied Energy, Elsevier, vol. 87(3), pages 988-1000, March.
    11. Presno, María José & Landajo, Manuel & Fernández, Paula, 2012. "Non-renewable resource prices. A robust evaluation from the stationarity perspective," MPRA Paper 42523, University Library of Munich, Germany.
    12. Detert, Neal & Kotani, Koji, 2013. "Real options approach to renewable energy investments in Mongolia," Energy Policy, Elsevier, vol. 56(C), pages 136-150.
    13. Presno, María José & Landajo, Manuel & Fernández, Paula, 2014. "Non-renewable resource prices: A robust evaluation from the stationarity perspective," Resource and Energy Economics, Elsevier, vol. 36(2), pages 394-416.
    14. Bernard, Jean-Thomas & Khalaf, Lynda & Kichian, Maral & McMahon, Sébastien, 2008. "Oil Prices: Heavy Tails, Mean Reversion and the Convenience Yield," Cahiers de recherche 0801, GREEN.
    15. Ghoshray, Atanu & Johnson, Ben, 2010. "Trends in world energy prices," Energy Economics, Elsevier, vol. 32(5), pages 1147-1156, September.
    16. Viju, Crina & Kerr, William A. & Nolan, James F., 2006. "Subsidization of the Biofuel Industry: Security vs. Clean Air?," 2006 Annual meeting, July 23-26, Long Beach, CA 21321, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    17. Zaklan, Aleksandar & Abrell, Jan & Neumann, Anne, 2016. "Stationarity changes in long-run energy commodity prices," Energy Economics, Elsevier, vol. 59(C), pages 96-103.
    18. Dorothée Charlier & Alejandro Mosino & Aude Pommeret, 2011. "Energy-saving Technology Adoption under Uncertainty in the Residential Sector," Annals of Economics and Statistics, GENES, issue 103-104, pages 43-70.
    19. Aleksandar Zaklan & Jan Abrell & Anne Neumann, 2011. "Stationarity Changes in Long-Run Fossil Resource Prices: Evidence from Persistence Break Testing," Discussion Papers of DIW Berlin 1152, DIW Berlin, German Institute for Economic Research.
    20. Phoebe Koundouri & Nikolaos Kourogenis, 2016. "On the Use of Quadratic Trends in Natural Resource Prices' Modeling," DEOS Working Papers 1608, Athens University of Economics and Business.

    More about this item

    Keywords

    option value; oil price uncertainty; abatement investment; sulfur emissions; pulp and paper industry; energy and heating sector;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-00343702. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.