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- Title
Climate Change Policy: The Effect of Real Options Valuation on the Optimal Mitigation-Adaptation Balance.
- Authors
Maybee, Bryan M.; Packey, Daniel J.; Ripple, Ronald D.
- Abstract
This paper illustrates the static optimisation strategies for climate change mitigation and adaptation using net marginal benefit analysis, and goes on to develop a dynamic optimisation solution using a modified Hotelling approach. Unfortunately, the situation required for a Hotelling-type optimisation to hold is rarely observed in practice, as there are numerous sources of uncertainty that impact upon a forward-looking optimisation exercise. The situation is no different within the climate change debate, with opportunities and threats to the value-maximising exercise arising as uncertainties are resolved through new information. Choices of how to deal with and take advantage of these opportunities and threats are keys to identifying the optimal trade-off between the strategies, and need to be included in the calculation of the optimal mixture of mitigation and adaptation activities. Based on reasonable assumptions, this paper discusses the impact of the real options valuation technique on the theoretical Hotelling-type optimisation to show what the effects of its application would have on the theoretical dynamic optimal solution and what those economic implications represent to public policy.
- Subjects
CLIMATE change; ECONOMIC opportunities; OPTIONS (Finance); ECONOMIC impact; GOVERNMENT policy; NUMERICAL calculations; ECONOMIC development
- Publication
Economic Papers, 2012, Vol 31, Issue 2, p216
- ISSN
0812-0439
- Publication type
Article
- DOI
10.1111/j.1759-3441.2011.00158.x