Early action investment in the Kyoto Protocol

• Main Author: Ma, Lingjuan
• Other Authors: St. Louis, Larry
• Format: Others
• Language: en
• Published: University of Saskatchewan 2003
• Subjects: Kyoto protocol; early action investment; uncertainty
• Online Access: http://library.usask.ca/theses/available/etd-09112003-133104/

Since uncertainty and irreversibility are inherent, environmental policy involves the problems of timing of implementation. Environmental policy based on cost-benefit analysis using certainty equivalent presents values can be misleading under the combined effect of irreversibility and uncertainty. Using real options method, the thesis analyzes the timing of early action investment in Canada's Kyoto commitment. Early action investment in emission reductions is irreversible. The thesis uses a simple two-period model, and then lays out a corresponding continuous-time model to show that under technological uncertainty, early action investment should be delayed until more information - the results of R&D - is revealed. In particular, the more uncertain the outcome of research, the more the firm should delay early action investment. The thesis argues that Canada's Kyoto commitment is well intentioned but not wisely implemented: early action investment on emission reductions may not be efficient. The results suggest that a more gradual Kyoto program would be favourable.