Real Options and Environmental Policies: The Good, the Bad, and the Ugly
Wesseler, J.H.H. ; Zhao, Jinhua - \ 2019
Annual Review of Resource Economics 11 (2019). - ISSN 1941-1340 - p. 43 - 58.
real options - environmental policy - irreversibility - precautionary principle - sustainability - technological change
The literature on real options shows that irreversibilities, uncertainties aboutfuture benefits and costs, and the flexibility in decision making generate benefitsand costs of delaying immediate action. When applied to government policy making, real option models can lead to efficient policies that take full account of these trade-offs, but they can also cause strategic behavior that tries to delay policies through influencing important elements such as downside risks. This contribution reviews the latest developments in real option–based policy research by looking at what we know about the benefits from waiting (the good), the costs from waiting (the bad), and how strategic behavior can influence policies (the ugly). Much has been said in the literature about the good and the bad, but more work is needed to study the ugly aspects of real option–driven policies.
Uncertainty and climate treaties: Does ignorance pay?
Dellink, R.B. ; Finus, M. - \ 2012
Resource and Energy Economics 34 (2012)4. - ISSN 0928-7655 - p. 565 - 584.
international environmental agreements - stability likelihood - irreversibility - strategies - coalitions - emissions - model
Uncertainty and learning play an important role in the management of many environmental and resource problems and in particular in climate change. In stylized game-theoretic models of international environmental treaty formation, which capture the strategic interactions between nations, learning usually has a negative impact on the success of cooperation. We use a richer climate model that captures the large heterogeneity between different world regions and considers uncertainty about the benefits and costs from climate mitigation. By explicitly exploiting differences between regions and allowing transfers to mitigate free-rider incentives, we derive much more positive conclusions about the role of learning.
Land speculation and interest rate subsidies as a cause of deforestation: The role of cattle ranching in Costa Rica
Roebeling, P.C. ; Hendrix, E.M.T. - \ 2010
Land Use Policy 27 (2010)2. - ISSN 0264-8377 - p. 489 - 496.
investment-uncertainty relationship - brazilian amazonia - adjustment costs - eastern amazonia - firm - economics - irreversibility - conservation - aggregate - lowlands
Land speculation by cattle ranchers is considered a principal cause of deforestation in Latin America, in particular in combination with (previously) widely provided interest rate subsidies. Proof for the hypothesis that land speculation leads to inflated rates of investment in land is, however, relatively limited and invariably related to the question of whether land prices tend to rise over time. Based on the Neoclassical investment theory with adjustment costs we develop a stochastic cattle ranching model in which land prices are modelled as geometric Brownian motion, to evaluate the effect of expected fluctuations in land prices on land investment decisions by cattle ranchers in Latin America. For a case study in the Atlantic Zone of Costa Rica, results show that the expected rate of investment is almost 35% underestimated in case land prices are assumed constant instead of fluctuating according to the standard deviation, while abolition of interest rate subsidies leads to an almost 15% decrease in the expected rate of investment. Consequently, it is shown that variability in land prices alone is a sufficient condition for land speculation, inflated rates of investment in land, larger farm sizes and, thus, higher rates of deforestation in agrarian frontier areas, while this process is further promoted by subsidized livestock credit or any other form of agricultural subsidy that increases the marginal production value of land
Investment spikes in Dutch greenhouse horticulture
Goncharova, N. ; Oskam, A. ; Oude Lansink, A.G.J.M. ; Vlist, A.J. van der; Verstegen, J.A.A.M. - \ 2008
Journal of Agricultural Economics 59 (2008)3. - ISSN 0021-857X - p. 516 - 536.
irreversibility - uncertainty - industry - lumps
The presence of investment cycles demonstrates the long-run policy of firms investing in particular periods (investment spikes) with lower or zero investment levels in between, which contradicts the smooth pattern predicted by a convex adjustment model. This paper investigates the spells between investment spikes in a discrete-time proportional hazard framework to estimate the probability of observing lumpy investment and factors underlying lumpy and intermittent patterns of investment. Duration models were estimated on two datasets: on an unbalanced panel and on average data of 10 'firm size' groups of Dutch greenhouse firms over the period 1975¿1999. Two specifications of the model were estimated: one includes only theoretically grounded variables, and the other specification is extended by empirically grounded variables. Theoretically based models can explain the occurrence of investment spikes. Both specifications of model show an investment cycle of six years. This is also confirmed for the average firm, which exhibits a higher hazard ratio in the 6th, 12¿13th and 21st years of duration.
Multiple equilibria, soil conservation investments and the resilience of agricultural systems
Antle, J.M. ; Stoorvogel, J.J. ; Valdivia, R.O. - \ 2006
Environment and Development Economics 11 (2006)4. - ISSN 1355-770X - p. 477 - 492.
fertility management - irreversibility - productivity - africa - kenya
This paper provides a new explanation for the persistent land degradation in some parts of the world, despite the availability of seemingly effective soil conservation technologies.We demonstrate that soil conservation technologies may induce agricultural systems to exhibit equilibria characterized by both low and high levels of soil degradation. These two equilibria are separated by a threshold level of soil degradation beyond which a conservation investment will not yield a positive return. Once a parcel of land crosses this productivity threshold, soil degradation becomes economically irreversible (it is not profitable to invest in soil conservation) even though the degradation may be technically reversible. A case study of terracing investments in Peru is used to demonstrate the existence of multiple equilibria under conditions typical of many marginal agricultural areas. These findings help explainwhy attempts to encourage permanent adoption of soil conservation practices often fail, and how more successful policies could be designed.
Biodiversity versus transgenic sugar beet: the one euro question
Demont, M. ; Wesseler, J.H.H. ; Tollens, E. - \ 2004
European Review of Agricultural Economics 31 (2004)1. - ISSN 0165-1587 - p. 1 - 18.
genetically-modified crops - pesticide use - uncertainty - investment - costs - irreversibility - economics - benefits - option - policy
The decision on whether to release transgenic crops in the EU is subject to irreversibility, uncertainty and flexibility. We analyse the case of herbicide-tolerant sugar beet and assess whether the EU's 1998 de facto moratorium on transgenic crops for sugar beet was correct from a cost-benefit perspective, using a real option approach. We show that the decision was correct, providing households on average value the possible annual irreversible costs of herbicide-tolerant sugar beet at El or more. On the other hand, the total net private reversible benefits forgone if the de facto moratorium is not lifted are around pound169 million per year.