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

Katrin Millock (1, 2) , Céline Nauges (3)

1 CES - Centre d'économie de la Sorbonne
2 PSE - Paris School of Economics
3 LERNA - Economie des Ressources Naturelles

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.

Mots clés: option value; oil price uncertainty; abatement investment; sulfur emissions; pulp and paper industry; energy and heating sector

Domaines: Economies et finances; Environnement et Société

Katrin Millock, Céline Nauges. The Effect of Uncertainty on Pollution Abatement Investments: Measuring Hurdle Rates for Swedish Industry. Resource and Energy Economics, 2008, 30 (4), pp.475-491. ⟨10.1016/j.reseneeco.2008.09.002⟩. ⟨halshs-00343702⟩