On the Option to Invest in Pollution Control Under a Regime of Tradable Emissions Allowances

23 Pages Posted: 24 Oct 2003

See all articles by Margaret C. Insley

Margaret C. Insley

University of Waterloo - Department of Economics

Abstract

Optimal decisions of a firm facing the option of retrofitting its plant to reduce pollution and thereby eliminate the need to purchase emissions allowances are analysed. The decision is treated as a real option with the price of pollution permits following a known stochastic process. The model is formulated as a set of one-dimensional partial differential equations. At discrete points in time, the firm owner makes optimal decisions about the retrofit, including whether to mothball temporarily. The model is used to analyse a firm's decision to instal a scrubber as a result of the 1990 U.S. Clean Air Act.

JEL Classification: Q25, D81, G31

Suggested Citation

Insley, Margaret C., On the Option to Invest in Pollution Control Under a Regime of Tradable Emissions Allowances. Available at SSRN: https://ssrn.com/abstract=459145

Margaret C. Insley (Contact Author)

University of Waterloo - Department of Economics ( email )

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HOME PAGE: http://economics.uwaterloo.ca/margaret-insley

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