the impact of possible climate catastrophes on global warming policy abstract recent studies on global warming have introduced the inherent uncertainties associated with the costs and benefits of climate policies and have often shown that abatement policies are likely to be less aggressive or postponed in comparison to those resulting from traditional cost benefit analyses cba yet those studies have failed to include the possibility of sudden climate catastrophes the aim of this paper is to account simultaneously for possible continuous and discrete damages resulting from global warming and to analyse their implications on the optimal path of abatement policies our approach is related to the new literature on investment under uncertainty and relies on some recent developments of the real option in which we incorporated negative jumps climate catastrophes in the stochastic process corresponding to the net benefits associated with the abatement policies the impacts of continuous and discrete climatic risks can therefore be considered separately our numerical applications lead to two main conclusions i gradual continuous uncertainty in the global warming process is likely to delay the adoption of abatement policies as found in previous studies with respect to the standard cba however ii the possibility of climate catastrophes accelerates the implementation of these policies as their net discounted benefits increase significantly

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

new results on the relationship among risk aversion prudence and temperance abstract this note studies the relationships between different aspects of agent s preferences toward risk we show that under the assumptions of non satiation and bounded marginal utility prudence implies risk aversion imprudence implies risk loving and that temperance implies prudence intemperance implies imprudence the implications of these results for comparing risks in the cases of increase in risk increase in downside risk and increase in outer risk are discussed

willingness to pay for stochastic improvements of future risk under different risk aversion abstract within a general intertemporal decision making framework this work shows one individual with more k th degree k 2 n ross risk aversion always chooses more current paying to improve his future payoff distribution when such stochastic improvement satisfies the n th degree mean preserving stochastic dominance moreover when stochastic improvement of the future payoff distribution is not mean preserving the notions of linearly quadratically restricted more ross risk aversion proposed by eeckhoudt liu and meyer 2017 can help provide a clear cut comparative statics analysis

a portfolio approach to climate investments capm and endogenous risk is there a role for investments in climate change mitigation despite low expected return we use a model of intertemporal expected utility maximisation to analyse this question similar to the capital asset pricing model capm the rate of return depends on the correlation of risk between the return on investments in climate change mitigation and the market portfolio but in contrast to the classical capm we admit the fact that economic and environmental systems are jointly determined implying that environmental risk is endogenous therefore investments in climate change mitigation may reduce risk via self protection and self insurance if risk reduction is accounted for in cost benefit evaluations climate investments may be justified despite low expected return these aspects of climate investments are not however communicated via standard cost benefit analyses of climate policy optimal climate policy may therefore be more ambitious than previously considered

option value of gasification technology within an emissions trading scheme investment analysis is mostly implemented with discounted cash flow dcf methods such as the net present value npv the problem in a typical application of these methods is the limited ability to value real options management s ability to adapt to changing market conditions or to revise decisions this paper presents a simulation model in which the investment is regarded as a single firm problem in an operating environment with multiple exogenous and stochastic prices the simulation model is used to explore the impact of emissions trading and in particular the european union emissions trading scheme eu ets on investments in integrated gasification combined cycle igcc plants two real case studies are presented modifications of an existing condensing power plant and a new combined heat and power plant the benefit of the selected approach is that it can take into account the value of multiple simultaneous real options better than a standard dcf analysis the results show that a straightforward application of dcf analysis can lead to biased results in competitive energy markets within an emissions trading scheme where a number of uncertainties potentially combined with several real options can make quantitative investment appraisals very complex

applying real options in investment decisions relating to environmental pollution abstract this study focuses on how to assess the optimal environmental investment decisions under economic and ecological uncertainty and establishes the continuous time model using the real option approach to optimize environmental pollution policy unlike traditional cost benefit analysis this work extends the model of pindyck r s 2002 optimal timing problems in environmental economics journal of economic dynamics and control 26 9 10 1677 1697 and attempts to identify the storage threshold of pollution stocks and the optimal timing for implementing environmental pollution decisions

an analysis of policy scenario effects on the adoption of energy production on the farm a case study in emilia romagna italy abstract the agriculture sector s contribution to energy production is a central issue in ongoing policy debates and one of the central elements of the development of bioeconomy sector the common agricultural policy cap is one of the main determinants of the different farm strategies of european farmers the cap is now undergoing a thorough revision process which necessarily includes a debate of the role of the policy in rural areas and the effectiveness of the various cap policy mechanisms the objective of this paper is to assess the impact of alternative cap scenarios in the light of the possible changes in 2013 and the willingness to adopt energy plants for energy crops in the province of bologna italy this is pursued using both survey information and farm household mathematical programming models hence using stated intentions and simulated profitability to analyse the adopt of new technologies for energy production the results underscore the relevance of the cap scenarios in altering intentions with regard to the adoption of energy production and the relevant effect of uncertainty in delaying the diffusion of energy production systems

optimal self protection in two periods on the role of endogenous saving self protection is a costly investment to reduce the probability of loss this paper studies optimal self protection in a two period model with endogenous saving in a setting with a binary loss we show that prudence is negatively associated with the optimal level of self protection consistent with results obtained in single period models we provide intuition for this finding with the help of a recent approach based on stochastic dominance furthermore we determine the effect of interest rate risk on optimal self protection and study a model in which a decision maker engages in advance effort to increase the probability of facing a better risky situation all our results suggest that the understanding of advance self protection crucially hinges on whether the decision maker also uses saving to optimize intertemporal consumption utility if so the fact that self protection expenditures are upfront turns out to be irrelevant

foreign exchange equivalence and project appraisal procedures this paper investigates the implications of different adjustment mechanisms for shadow pricing traded and nontraded goods in a flexible price model a foreign exchange equivalent rule that can be readily adapted whatever the adjustment mechanism is derived it is shown that traded commodities are always valued at border prices and nontraded commodities can always be shadow priced in terms of changes in production and consumption of traded goods valued at border prices the role of the shadow exchange rate and the implications for measuring the balance of payments effect when no tax adjustment policy is assumed are also discussed copyright 1990 by royal economic society

global warming irreversibility and learning a number of economists have argued that the literature on the irreversibility effect implies that current abatement of greenhouse gas emissions should be greater when there is the possibility of obtaining better information in the future about the potential damages from global warming than when there is no possibility of obtaining better information in this paper we show that even the simplest model of global warming does not satisfy either of epstein s 1980 sufficient conditions so it is not possible to use epstein s analysis to tell whether the irreversibility effect applies to models of global warming we derive an alternative sufficient condition for the irreversibility effect to hold

higher order generalizations of arrow pratt and ross risk aversion a comparative statics approach abstract we analyze comparative risk aversion in a new way through a comparative statics problem in which for a cost agents can shift from an initial probability distribution toward a preferred distribution the ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary and the arrow pratt characterization arises when the original distribution differs from the preferred distribution by a simple mean preserving spread and the cost is a utility cost higher order increases in risk lead to higher order generalizations and the comparative statics method yields a unified approach to the problem of comparative risk attitudes

welfare measurement under threats of environmental catastrophes abstract welfare measures under threats of environmental catastrophes are studied using the parable apparatus of weitzman and lofgren on the welfare significance of green accounting as taught by parable j environ econ manage 32 1997 139 153 the occurrence probability of the catastrophic events is driven at least partly by anthropogenic activities such as natural resource exploitation without external effects the green nnp is a genuine welfare measure vis a vis a particular parable economy often however the occurrence hazard constitutes a public bad treated as an externality by agents who ignore their own contribution to its accumulation in such cases the green nnp although accounting for the event hazard rate per se fails to properly internalize future effects on the hazard rate of current economic activities and as a result overestimates welfare the bias term associated with the green nnp is derived and expressed in a simple and interpretable form

the rationale of the mean standard deviation analysis skewness preference and the demand for money publisher summary this chapter discusses the rationale of the mean standard deviation analysis skewness preference and the demand for money in january 1969 issue of the review of economic studies karl borch and martin feldstein separately criticized the widely used mean variance analysis of portfolio selection borch contended that any system of upward sloping mean standard deviation e s indifference curves can be shown to be inconsistent with the basic axiom of choice under uncertainty he pointed out that one can always pick any two points on an upward sloping indifference curve to represent two bernoulli distributions with probability 1 p of gaining the same amount x in both the cases and probability p of gaining y1 in the case of one distribution and y2 in the case of the second distribution with y2 y1 if the second distribution represents the point to the northeast of the other point then by the dominance axiom the second distribution must be preferred to the first which contradicts the basic meaning of indifference curves feldstein by using a log utility function and a lognormal distribution for investment outcome showed that e s indifference curves for a risk averter need not be convex downwards though upward sloping they would change from convex to concave once the standard deviation of the outcome exceeds the mean multiplied by on the face of it this seems to suggest that risk aversion might decrease as risk is increased beyond a certain extent

risk aversion prudence and temperance a unified approach abstract risk aversion can be defined either by the negative sign of the second derivative of the utility function or by the rejection of any mean preserving increase in risk the more recent notions of prudence and temperance have so far been defined exclusively by the sign of the third and the fourth derivative of the utility function in this paper we show that as risk aversion prudence and temperance can also be interpreted as systematic attitudes towards transformation of a density function

the option value of renewable energy the case of climate change decision makers receive mixed signals from the investment literature on when it is appropriate to develop renewable energy technology substitutes for fossil fuels this question is becoming more important as attention has become focused on climate change with the assumptions that information is revealed as time passes and the new technologies take a long time to develop renewable energy alternatives are more attractive than they appear on the basis of the net present value criterion that ignores option value option value represents the value of flexibility to use or discard new technologies

economics of climate change under uncertainty benefits of flexibility abstract the selection of climate policy has to be made in an extremely uncertain environment both benefits and costs of a particular climate policy are unknown and in the best case could be described by the probability distribution of various outcomes dominated in literature the expected value approach to the cost benefit analysis of climate policy under uncertainties relies on the aggregated estimation of various outcomes of climate policy weighted and averaged by probabilities the variance skewness and kurtosis are important characteristics of uncertainties but can be easily lost in the process of aggregation the real option analysis roa explicitly accounts for both the expected value of underling assets and the variance of the expected value as well as skewness and kurtosis that are important to describe a fat tail phenomenon in the paper we propose an application of the real option analysis in order to formulate rules for the selection of a climate policy emission target and estimate the economic value of the future flexibility created by interim climate policy which may be corrected in the future in response to new knowledge that hopefully reduces uncertainties the initially selected interim policy has an option value and methodology for its valuation presented in the paper

optimal timing problems in environmental economics abstract because of the uncertainties and irreversibilities that are often inherent in environmental degradation its prevention and its economic consequences environmental policy design can involve important problems of timing i use a simple two period model to illustrate these optimal timing problems and their implications for environmental policy i then lay out and solve a continuous time model of policy adoption in which the policy itself entails sunk costs and environmental damage is irreversible the model generalizes earlier work in that it includes two stochastic state variables one captures uncertainty over environmental change and the other captures uncertainty over the social costs of environmental damage solutions of the model are used to show the implications of these two types of uncertainty for the timing of policy adoption

fundamental irreversibilities in stock externalities abstract this paper concerns the irreversibility effect in stock externalities in an environment of uncertainty with learning taking place one may wish to under emit today to avoid potential environmental irreversibilities alternatively one may wish to under invest in pollution control capital avoiding investments in sunk capital that turn out to be wasted the paper develops theoretical results on the tension between these two effects and separates risk aversion from the irreversibility effect the paper also presents a simple example in climate change policy

skewness preference risk aversion and the precedence relations on stochastic changes this paper provides a general choice theoretic characterization of the trade off between risk and skewness whose importance in understanding risk taking behavior is well documented in empirical studies the condition under which the prudence measure kimball 1990 characterizes the strength of an individual s downside risk aversion against his own risk aversion is identified and interpreted in a unifying framework based on the concept of one stochastic dominant change preceding another and that of the desirability of a stochastic change the framework is also shown to be useful for a better understanding of the arrow pratt measure the stronger ross measure and the coincidence of the characterizations of downside risk aversion and prudence as well as the relationship between stochastic dominances of different degrees

a cost benefit analysis of slowing climate change there are many conflicting views regarding the true dimensions of the climate change problem often these viewpoints are based on different estimates of key parameters with little indication as to why parameter estimates vary so much and which ones might be the more reliable the prospects for a co ordinated strategy to tackle climate change appear dim little consensus has emerged for example regarding the costs of abating carbon emissions some take the view that considerable improvements in energy efficiency are available at negative cost by setting minimum efficiency standards for vehicles and domestic appliances e g mills et al 1991 others regard the macroeconomic costs of even small reductions in carbon emissions as substantial manne and richels 1993 in the judgement of other researchers a proportion of carbon emissions arise purely as a result of institutional failings either at a regional level in the subsidies paid to fossil fuel energy producers in the erroneous belief that this promotes economic growth shah and larsen 1994 in failure to deal with air pollution glomsrod et al 1992 and vehicle congestion in urban areas hughes 1994 or at a global level in failing to make appropriate transfers to those countries whose forests contain rich biodiversity which we would wish to preserve pearce 1991

greater prudence and greater downside risk aversion abstract variation in the degree of downside risk aversion across decision makers has implications for efficient risk sharing however except for small differences in risk preferences there is no index analogous to the arrow pratt index of risk aversion that depends only on local properties of the utility function and indicates the degree of aversion to downside risk a measure that does depend only on local properties of the utility function u the index of prudence p u u is related to downside risk aversion which is indicated by a positive value for u although we show that the degree of prudence is not an accurate indicator of the degree of downside risk aversion we nonetheless demonstrate that a uniform increase in prudence accompanied by a uniform increase decrease in risk aversion is sufficient to indicate greater downside risk aversion provided prudence is greater less than three times the degree of risk aversion

regulatory actions under adjustment costs and the resolution of scientific uncertainty food system regulators often decide whether to ban existing practices or approve new technologies without conclusive scientific evidence on possible damage and knowing that resolution is likely in the future in a model with three decision points and stochastic resolution of uncertainty we study interactions between expected losses due to regulation and information availability when a regulator is deciding on an early reversible ban and on a later reversible ban adjustment costs create inertia concerning intermediate signals such that earlier decisions are not overturned and also a bias against imposing an early ban the prospect of more later stage information can increase or decrease the incentive to ban early but research decreases the incentive to ban early

the economics of controlling stock pollutants an efficient strategy for greenhouse gases abstract optimal control theory is applied to develop an efficient strategy to control stock pollutants such as greenhouse gases and hazardous waste the optimal strategy suggests that at any time the marginal costs of abatement should be equated with the present value of the marginal damage of timely unabated emission the optimal strategy calls for increasingly light abatement over time as the pollutant stock accumulates the optimal policy applied to greenhouse gases suggests moderate abatement efforts at present with the potential for much greater future efforts

optimal climate policy is a utopia from quantitative to qualitative cost benefit analysis abstract the dominance of quantitative cost benefit analysis cba and optimality concepts in the economic analysis of climate policy is criticised among others it is argued to be based in a misplaced interpretation of policy for a complex climate economy system as being analogous to individual inter temporal welfare optimisation the transfer of quantitative cba and optimality concepts reflects an overly ambitious approach that does more harm than good an alternative approach is to focus the attention on extreme events structural change and complexity it is argued that a qualitative rather than a quantitative cba that takes account of these aspects can support the adoption of a minimax regret approach or precautionary principle in climate policy this means implement stringent ghg reduction policies as soon as possible

regulation with anticipated learning about environmental damages a regulator anticipates learning about the relation between environmental stocks and economic damages for a model with linear quadratic abatement costs and environmental damages and a general learning process we show analytically that anticipated learning decreases the optimal level of abatement at a given information set if learning causes the regulator to eventually decide that damages are higher than previously thought learning eventually increases abatement learning also favors the use of taxes rather than quotas using a model that is calibrated to describe the problem of global warming we show numerically that anticipated learning causes a significant reduction in first period abatement and a small increase in the preference for taxes rather than quotas even if the regulator s initial priors about environmental damages are much too optimistic he is able to learn quickly enough to keep the expected stock trajectory near the optimal trajectory

application of the modified tobin s q to an uncertain energy saving project with the real options concept abstract this paper is to develop a modified tobin s q evaluation method which successfully combines the evaluation criteria of the traditional tobin s q and the real options this study provides flexible thinking for decision making criteria that is it clearly provides decision makers with a reference in choosing enter or exit strategies such as quantitative indicators references the proposed model introduces two variables stochastic process in continuous time and explores the impact of the occurrence of unexpected events on the project value so that it can more authentically response to the project value the studied issue deals with the firms that have not established energy saving equipment yet it attempts to figure out the optimal timing to adopt an energy saving investment project when it is beneficial and the optimal timing to terminate it when the continuous operation of that business is unprofitable the future discounted benefit cost ratio q follows the geometric brownian motion with the poisson jump process and the replacement of investment equipment except for the evaluation of energy saving equipment investment project the proposed model can be applied to other related project evaluation issues such as energy saving co 2 emission reduction or general investment projects

a general index of absolute risk attitude many results involving expected utility theory call upon the notions of absolute risk aversion prudence and or temperance this paper exploits a representation of the friedman savage utility premium friedman m l j savage 1948 the utility analysis of choices involving risk j political econom 56 4 279 304 to give a general foundation for such coefficients and for their higher order extensions

project appraisal procedures and the evaluation of foreign exchange different procedures for evaluating foreign exchange have been suggested in the project appraisal manuals of unido and little and mirrlees while it is widely agreed that the manuals differ in their practical procedures there has been disagreement as to whether they are equivalent in principle using a model due to boadway we show that the manuals differ in principle the little mirrlees procedure can be given an interpretation which correctly values traded and non traded goods in project appraisal while the unido formula for the shadow exchange rate is not required when the balance of payments constraint is binding

ecology driven real options an investment framework for incorporating uncertainties in the context of the natural environment the role of uncertainty within an organization s environment features prominently in the business ethics and management literature but how corporate investment decisions should proceed in the face of uncertainties relating to the natural environment is less discussed from the perspective of ecological economics the salience of ecology induced issues challenges management to address new types of uncertainties these pertain to constraints within the natural environment as well as to institutional action aimed at conserving the natural environment we derive six areas of ecology induced uncertainties and propose ecology driven real options as a conceptual approach for systematically incorporating these uncertainties into strategic management we combine our results in an integrative investment framework and illustrate its application with the case of carbon constraints

risk averse mitigation decisions in an unpredictable climate system risk aversion plays a central role in the decisions made in the face of uncertainties and climate change mitigation should be no exception however the interlinkage of risk aversion and climate change uncertainties has hardly been investigated numerically in part because of the computational difficulties of stochastic optimization in this paper we apply the numerical techniques of stochastic optimization to the economic modeling of climate change with the aim of modeling the decision preferences of a risk conscious agent in the face of unpredictable climate change the model underlines the critical role played by the risk aversion parameter in determining the effects of uncertainties on mitigation not only in level but also in sign

testing day s conjecture that more nitrogen decreases crop yield skewness whilecontroversysurroundsskewnessattributesoftypicalyielddistributions abetterunderstandingis importantforagriculturalpolicyassessmentandforcrop insuranceratesetting day 1965 conjectured that crop yield skewness declines with an increase in nitrogen use at low levels but not at higher levels employing four corn yield experimental plot datasets we investigate the conjecture by introducing a a flexible bayesian extension of the just pope technology to incorporate skewness and b a quantilebased measure of skewness shift bayesian estimation provides strong evidence in favor of negative skewnessatcommercialnitrogenratesandforday sconjecture therewasweakerevidenceinfavorof positively skewed cotton yield and little evidence in favor of the conjecture the results are confirmed by the quantile based measure we also find evidence that skewness becomes more negative upon moving from corn after corn to corn after soybean

learning and stock effects in environmental regulation the case of greenhouse gas emissions abstract this paper concerns the optimal regulation of greenhouse gases that lead to global climate change in particular we focus on uncertainty and learning which over time resolves uncertainty we present an empirical stochastic model of climate economy interactions and present results on the tension between postponing control until more is known vs acting now before irreversible climate change takes place uncertainty in our model is in the damage caused by global warming the results suggest that a temporary carbon tax may dominate a permanent one because a temporary tax may induce increased flexibility

designing climate mitigation policy this us paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs damage valuation policy instrument choice technological innovation and international climate policy the authors begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be both under cost effective stabilization of global climate and under net benefit maximization or pigouvian emissions pricing the remainder of the paper focuses on the appropriate scope of regulation issues in policy instrument choice complementary technology policy and international policy architectures

an entry and exit model on the energy saving investment strategy with real options this paper presents an improved decision model based on the real options approach presented by ansar and sparks 2009 for the firms that have not yet established energy saving equipment under the entry and exit strategies furthermore the proposed model takes account of the inevitable equipment renewal and the occurrence of unexpected events under the poisson jump process the timing for terminating an investment when continuous operations of that business are unprofitable is also explored to realize the optimal timing of implementing the energy saving strategy the future discounted benefit b follows the geometric brownian motion with the poisson jump process and the replacement of investment equipment a numerical analysis is followed by a sensitivity study of various parameters to better realize their impacts on the entry and exit thresholds the results show that for the jump case the higher probability of occurrence of unfavorable events will result in a higher entry threshold and lower exit threshold investors are forced to request higher benefit thresholds to cover the higher probability of losses brought by unfavorable events

optimal investment in clean production capacity for the mitigation of long term pollution threats one must consider that both the process of environmental degradation and the switchover to new and cleaner technologies are dynamic we develop a model of a uniform good that can be produced by either a polluting technology or a clean one the latter is more expensive and requires investment in capacity we derive the socially optimal pollution stock accumulation and creation of nonpolluting production capacity weighing the tradeoffs among consumption investment and djustment costs and environmental damages we consider the effects of changes in the pollution decay rate the capacity depreciation rate and the initial state of the environment on both the steady state and the transition period the optimal transition path looks quite different with a clean or dirty initial environment with the former investment is slow and the price of pollution may overshoot the long run optimum before converging with the latter capacity may overshoot

project appraisal and foreign exchange constraints a comment a paper in this journal by blitzer dasgupta and stiglitz i98i hereinafter bds entitled project appraisal and foreign exchange constraints examines the implications of various non optimal macroeconomic adjustment policies for project evaluation the discussion is presented in terms of a simple two good one consumer economy with price distortions which lead the ratio of the domestic price of the exported good e to the domestic price of the imported good i to be greater than the internati onal price ratio it is argued that the resulting trade gap will force the government to pursue an adjustment policy which may take the form of taxation of income or commodities rationing or foreign borrowing and it is shown that the choice of policy will determine the appropriate shadow price formulae to be used in project appraisal the view that world prices provide shadow prices for traded goods is argued to be correct for some but not all of the macroeconomic policies considered this comment argues that the bds analysis fails to specify how tax revenue is to be incorporated in the model as a result the various policy options open to the government are not clearly brought out we set out below in section i an amplified version of the bds general equilibrium model which includes tax revenue and use it to show how the different adjustment mechanisms have to be related to the public sector budget constraint in section ii we reconsider their analysis and show that if either an income or a commodity tax on the importable is used to ensure public sector balance then world prices remain shadow prices for traded goods in section iii we make the point that the presence of import tariffs does not imply in the context of a real general equilibrium model that the balance of payments constraint will be violated the conclusion is drawn that endogenous foreign borrowing cannot be analysed without respecifying the basic bds model our comment is confined to the problem of shadow pricing traded goods in the bds model we do not consider rationing as a means of macroeconomic adjustment policy nor do we comment on their section iii where they analyse the additional problems which follow from introducing a non traded commodity into the model

wind farm investment risks under uncertain cdm benefit in china abstract china has set an ambitious target to increase its wind power capacity by 35 gw from 2007 to 2020 the country s hunger for clean power provides great opportunities for wind energy investors however risks from china s uncertain electricity market regulation and an uncertain energy policy framework mainly due to uncertain clean development mechanism cdm benefits prevent foreign investors from investing in china s wind energy the objectives of this paper are to 1 quantify wind energy investment risk premiums in an uncertain international energy policy context and 2 evaluate the impact of uncertain cdm benefits on the net present values of wind power projects with four scenarios this study simulates possible prices of certified emissions reductions cers from wind power projects project net present values npvs have been calculated the project risk premiums are drawn from different and uncertain cer prices our key findings show that uncertain cdm benefits will significantly affect the project npvs this paper concludes that the chinese government needs revising its tariff incentives most likely by introducing fixed feed in tariffs fits and re examining its cdm granting policy and its wind project tax rates to facilitate wind power development and enable china to achieve its wind energy target

global environmental risks the need to manage climate risks is not a new it has shaped social institutions for many centuries in medieval england a peasant farmer s land was broken into many widely dispersed parcels economic historians interpret this as a way of hedging climate risk see references in bromley 9 land in different locations would be affected differently by droughts floods and frosts by spreading land holdings over different locations as well as by organizing agricultural cooperatives and buying insurance farmers have managed climate risk for many centuries

choosing children s environmental risk a model of endogenous risk provides a foundation to study a parent s child care decisions when the child could be exposed to an environmental hazard e g toxic substance foodborne pathogen the parent invests in childcare quality and quantity to reduce the likelihood of a hazard exposure occurring and to reduce its severity if the exposure is realized we supply conditions to sign unambiguously the effects on a child s hazard exposure of an increased probability a parent fails to access or have command over a technique of exposure prevention or that a technique is ineffective in preventing exposure also we consider these effects when the parent is unsure what a technique can do to reduce the child s probability of exposure we conclude public policies designed to encourage use of a particular childcare technique if childcare quality and quantity are stochastic substitutes can reduce parental use of other techniques the net impact of the policy could increase the chance the child suffers

risk aversion and the propensities for self insurance and self protection for a risk averse individual the methods for reducing the expected financial impact of a loss include reducing the severity of any loss that occurs self insurance and reducing the probability of the occurrence of a loss self protection the literature on this topic has pointed to several anomalies whereby the use of self protection and self insurance yield quite unsimilar results for example ehrlich and becker 5 show that self insurance is always a substitute for market insurance an insurance company s indemnifying a loss whereas self protection and market insurance might be complements dionne and eeckhoudt 4 show that a more risk averse consumer would always invest more in self insurance activities but not necessarily more in self protection activities they argue 4 42 that this result is counterintuitive and provides an exception to the widely accepted result that increased risk aversion reduces risky activities ehrlich and becker 5 639 argue that the incentive to self protect is not so dependent on attitude towards risk both of the above papers seem to take for granted that self protection activities reduce the riskiness of the final wealth distribution however as we argue below this is not the case if riskiness is defined as in rothschild and stiglitz 14 even if we use the variance as our risk measure we do not always reduce risk via self protection dionne and eeckhoudt suggest that these results might not be robust enough to extend to models that incorporate random initial wealth risk and state dependent preferences we show that the model seems to be very robust we also explain why self protection is not at all an exception to the long standing result of arrow 1 whereby more risk averse individuals undertake a lower

a note on parental and child risk valuation the paper develops a model that allows the estimation of parent s valuation of own and child health in an endogenous risk framework where parents can employ multiple activities to protect themselves and their children from a health risk these risk reducing activities may differ in their effectiveness and their intensity of use we suggest how to estimate the parent s ex ante marginal willingness to pay for a reduction in the ambient level of health risk unencumbered by expected utility terms

project appraisal and foreign exchange constraints a rejoinder in their comment on blitzer dasgupta and stiglitz i98i bds dinwiddy and teal i987 dt state that many of the points made in this note apply to bell and devarajan i983 however for clarity we confine ourselves to commenting on only bds the purpose of this note is to point out that none of dt s criticisms of the bds piece applies to our i 983 paper in fact we make essentially the same points using a somewhat more general model than dt our results are consistent with but not subsumed by those of dt and are therefore sometimes at variance with those of bds dt s main claim is that bds s assertion that the border price rule fails to hold when commodity taxation is used as the equilibrating device is false this stricture does not apply to our i 983 paper for in every single case we consider the relative shadow prices of the two tradeable goods are shown to be their relative border prices see our equations 22 and 23 28 and 29 and 33 and 34 dt show that when commodity taxation is the equilibrating device shadow prices are proportional to world prices in contrast to bds s claim we derive the same result in the case when the tariff on one of the tradeable goods is the equilibrating device p 474 moreover dt s specific criticisms of bds s treatment of the public sector s budget do not carry over to our model unlike bds we do specify how tax revenues are incorporated in the system see our equation i4 nor did we overlook the accounting relationship between the public sector budget deficit and the current account deficit 1 we state t he government s budget deficit or surplus registers an equal change in the government s net foreign assets through foreign borrowing or lending p 46i hence endogenous foreign borrowing in our model arises precisely in the case when the public sector s budget constraint is not satisfied due to tax rates and public expenditures being exogenously given to conclude while dt make several valid criticisms about the bds paper their attempt to tar our i983 paper with the same brush is unwarranted

shadow prices for project evaluation under alternative macroeconomic specifications for purposes of social cost benefit analysis a project may be viewed as a disturbance to the economy displacing it from some initial equilibrium to a new one but the new configuration will depend on which particular variables adjust to restore equilibrium this paper examines the shadow prices for project evaluation under alternative assumptions about how equilibrium is restored when the government reacts by altering its foreign exchange reserves the shadow prices coincide with those advocated in the manuals on social cost benefit analysis however if the government adjusts its domestic expenditures or tariff rates the shadow prices will differ from those of the manuals except insofar as the relative shadow prices of tradeables remain their relative border prices the paper first presents the model followed by two cases in which domestic prices and wage rates do not vary because ad valorem tariffs are fixed and one case in which they are endogenous

the impact of prudence on optimal prevention revisited this paper re examines the link between absolute prudence and self protection activities we show that the level of efiort chosen by an agent with positive and decreasing absolute prudence is larger than the optimal efiort chosen by a risk neutral agent if the degree of absolute prudence is less than a threshold that is utility independent and empirically veriflable we explain this threshold by a trade ofi between the variation of the variance and the level of the third moment of the loss distribution we also discuss our result in terms of skewness our contribution extends the model of eeckhoudt and gollier 2005

emission permit banking pollution abatement and production inventory control of the firm abstract in this paper we present a dynamic model modified with emission permit banking and pollution abatement and investigate the effect of emission permit banking and pollution abatement on the production inventory strategy of the firm after introducing emission permit banking and pollution abatement the cost function consists of the inventory holding and production costs the cost of investment in abatement capital goods and the emission procurement selling cost furthermore the inventory holding costs are linear production costs are non decreasing and convex functions of the production level and the costs of investment in abatement capital goods are increasing and convex functions of the investment level we compare the optimal production inventory strategy before emission permit banking and pollution abatement and thereafter the mathematical investigation is based on the arrow karlin model

global warming endogenous risk and irreversibility this paper develops two period analytical and numerical models to study the question given a stock of greenhouse gases that poses a risk of future damages of unknown magnitude and the possibility of learning about damages how do sunk abatement capital and a nondegradable stock of greenhouse gases affect optimal first period investment we show that both affect investment the former negatively and the latter positively additionally endogenous risk the risk of damages dependent on the stock of gases results in an increase in optimal investment for any level of capital sunkness or greenhouse gas degradability quantitatively the effect of sunk capital is stronger than the effect of greenhouse gas irreversibility or that of endogenous risk

exploring higher order risk effects higher order risk effects play an important role in examining economic behavior under uncertainty a precautionary demand for saving has been linked to the property of prudence and the property of temperance has been used to show how the presence of an unavoidable risk affects one s behavior towards a second risk these two properties also play key roles in aversion to negative skewness and to kurtosis respectively both properties recently have been characterized by preferences over lottery pairs in simple 50 50 gambles the simplicity of this characterization is ideal for experimental investigation this article reports the results of such experiments and concludes that there is behavioral evidence for prudence but not for temperance implications of these results for both expected utility and non expected utility models are examined

substituting one risk increase for another a method for measuring risk aversion abstract this paper defines the rate of substitution of one stochastic change to a random variable for another it then focuses on the case where one of these changes is an nth degree risk increase and the other is an mth degree risk increase where n m 1 the paper shows that the rate of substitution for these two risk increases can be used to provide a broader definition and two additional characterizations of the nth degree ross more risk averse partial order the implications for local intensity measures of nth degree risk aversion are also examined the analysis organizes the existing results as well as generates new ones

george bush versus al gore irreversibilities in greenhouse gas accumulation and emission control investment abstract this paper investigates the fundamental problem of mitigating the impacts of climate change in an environment of uncertainty and learning in particular the paper uses a stochastic version of nordhaus s dice model to show that the irreversibility of investment capital has a stronger effect than irreversibilities in climate change other than catastrophic effects the implications are that if abatement decisions are irreversible there should be less emission control today than would be optimal without taking learning into account and that policy makers should pursue control policies that are costlessly reversible a variant on the no regrets strategy

specifications of social welfare in economic studies of climate policy overview of criteria and related policy insights an important assumption in economic studies of climate policy is the social welfare function this paper shows that applying distinct decision or social welfare criteria can result in different optimal policies of climate control notably if climate change impacts are uncertain first decision criteria in current climate economic studies are reviewed next the most important alternatives are discussed including their mathematical formalization and incorporation in economy climate models most of these alternative criteria suggest more stringent climate policies to be optimal than the standard discounted utilitarianism approach however several important welfare criteria have not or hardly seen any application in the economic analysis of climate policy we conclude that there is clear need for systematic research on this theme for which the current review provides a solid basis

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

carbon market risks and rewards firm perceptions of cdm investment decisions in brazil and india the carbon market experiences of brazil and india represent policy success stories under several criteria a careful evaluation however reveals challenges to market development that should be addressed in order to make the rollout of a post 2012 cdm more effective we conducted firm level interviews covering 82 cdm plants in the sugar and cement sectors in brazil and india focusing on how individual managers understood the potential benefits and risks of undertaking clean development mechanism cdm investments our results indicate that the cdm operates in a far more complex way in practice than that of simply adding a marginal increment to a project s internal rate of return our results indicate the following first although anticipated revenue played a central role in most managers decisions to pursue cdm investments there was no standard practice to account for financial benefits of cdm investments second some managers identified non financial reputational factors as their primary motivation for pursuing cdm projects and third under fluctuating regulatory regimes with real immediate costs and uncertain cdm revenue managers favored projects that often did not require carbon revenue to be viable the post 2012 cdm architecture can benefit from incorporating these insights and in particular reassess goals for strict additionality and mechanisms for achieving it

testing for prudence and skewness seeking numerous theoretical predictions such as precautionary saving or preventive behavior have been derived for prudent decision makers further prudence can be characterized as downside risk aversion and plays a key role in preference for skewness we use a simple experimental method to test for prudence and skewness preference in the laboratory and compare the two to this end we introduce a novel graphical representation of compound lotteries that is easily accessible to subjects and test it for robustness using a factorial design prudence is observed on the aggregate and individual level we find that prudence does not boil down to skewness seeking we further provide some theoretical explanations for this result this paper was accepted by peter wakker decision analysis

evaluating the power investment options with uncertainty in climate policy abstract this paper uses a real options approach roa for analysing the effects of government climate policy uncertainty on private investors decision making in the power sector it presents an analysis undertaken by the international energy agency iea that implements roa within a dynamic programming approach for technology investment choice case studies for gas coal and nuclear power investment are undertaken with the model illustrative results from the model indicate four broad conclusions i climate change policy risks can become large if there is only a short time between a future climate policy event such as post 2012 and the time when the investment decision is being made ii the way in which co 2 and fuel price variations feed through to electricity price variations is an important determinant of the overall investment risk that companies will face iii investment risks vary according to the technology being considered with nuclear power appearing to be particularly exposed to fuel and co 2 price risks under various assumptions and iv the government will be able to reduce investors risks by implementing long term say 10 years rather than short term say 5 years climate change policy frameworks contributions of this study include 1 having created a step function with stochastic volume of jump at a particular time to simulate carbon price shock under a particular climate policy event 2 quantifying the implicit risk premium of carbon price uncertainty to investors in new capacity 3 evaluating carbon price risk alongside energy price risk in investment decision making and 4 demonstrating roa to be a useful tool to quantify the impacts of climate change policy uncertainty on power investment

the utility premium of friedman and savage comparative risk aversion and comparative prudence we show that the utility premium of friedman and savage can be used to explain comparative risk aversion and comparative prudence more precisely we show that the greater the risk aversion measure the greater a risk s utility premium normalized by the marginal utility and that the greater the prudence measure the greater the utility premium for disaggregating a certain loss of wealth and a zero mean risk normalized by the utility function s second derivative

conditional coskewness in stock and bond markets time series evidence in the context of a three moment intertemporal capital asset pricing model specification we characterize conditional coskewness between stock and bond excess returns using a bivariate regime switching model we find that both conditional u s stock coskewness the relation between stock return and bond volatility and bond coskewness the relation between bond return and stock volatility command statistically and economically significant negative ex ante risk premiums the impacts of stock and bond coskewness on the conditional stock and bond premiums are quite robust to various model specifications and various sample periods and also hold in another major developed country the united kingdom the findings also carry important implications for portfolio management

choosing between risky prospects the characterization of comparative statics results and location independent risk we consider expected utility maximizers choosing from a family of risky prospects and examine how choice is influenced by the decision makers attitude to risk if the family of risky prospects can be ordered so that as decision makers are more risk tolerant they choose a gamble higher in the ordering then it is natural to say that the family of risky prospects admit a comparative static result the paper characterizes when comparative static results of this sort exist an application is to propose a criterion of location independent riskiness

stochastic dominance analysis without the independence axiom we characterize the consistency of a large class of nonexpected utility preferences including mean variance preferences and prospect theory preferences with stochastic orders for example stochastic dominances of different degrees our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision maker s preferences as an illustration we consider in some detail prospect theory and choice acclimating preferences two popular models of reference dependence under risk and we show the incompatibility of loss aversion with prudence this paper was accepted by james smith decision analysis

emissions trading and investment decisions in the power sector a case study in finland abstract organizations which consider investment in or divestment of power production licences capacity within the european community are exposed to the impacts of the european union emission allowance trading scheme eu ets in this paper the consequences of the eu ets on investment decisions are explored in a country specific setting in finland first we review the general mechanisms through which the eu ets influences size timing and cashflows of an investment next we discuss the projected changes in finnish power producers investment environment and examine the financial impacts due to the eu ets on a case investment decision a hypothetical condensing power plant 250 mwe the standard discounted cash flow dcf analysis is extended to take into account the value of two real options the option to wait and the option to alter operating scale in a quantitative investment appraisal the impact of emissions trading not only depends on the expected level of allowance prices but also on their volatility and correlation with electricity and fuel prices the case study shows that the uncertainty regarding the allocation of emission allowances is critical in a quantitative investment appraisal of fossil fuel fired power plants

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

structural breaks and electricity prices further evidence on the role of climate policy uncertainties in the australian electricity market the primary objectives and the strategies of a national electricity market are the efficient delivery of network services and the electricity infrastructure to meet the long term consumer s interests therefore the objective of this study is to explore whether electricity prices across the six australian states display instability such instability is closely associated with the presence of structural breaks in relevance to policy events on australian carbon policies the study makes use of weekly australian wholesale electricity prices spanning the period from june 8th 2008 to march 30th 2014 along with linear and non linear unit root testing methodologies the results provide supportive evidence that the australian electricity market can be described as a less stable electricity market which implies that a high degree of market power is exercised by generators across regional markets these findings are expected to have substantial consequences for the effectiveness of carbon dioxide mitigating policies especially when there is uncertainty as to whether the planned environmental policy is put in place for the lifespan of undertaken investments