Framstad, Nils ChristianStrand, Jon2013-09-042013-09-042013-04https://hdl.handle.net/10986/15572Energy-intensive infrastructure may tie up fossil energy use and carbon emissions for a long time after investments, making the structure of such investments crucial for society. Much or most of the resulting carbon emissions can often be eliminated later, through a costly retrofit. This paper studies the simultaneous decision to invest in such infrastructure, and retrofit it later, in a model where future climate damages are uncertain and follow a geometric Brownian motion process with positive drift. It shows that greater uncertainty about climate cost (for given unconditional expected costs) then delays the retrofit decision by increasing the option value of waiting to invest. Higher energy intensity is also chosen for the initial infrastructure when uncertainty is greater. These decisions are efficient given that energy and carbon prices facing the decision maker are (globally) correct, but inefficient when they are lower, which is more typical. Greater uncertainty about future climate costs will then further increase lifetime carbon emissions from the infrastructure, related both to initial investments, and to too infrequent retrofits when this emissions level is already too high. An initially excessive climate gas emissions level is then likely to be worsened when volatility increases.en-USCC BY 3.0 IGOABATEMENTABATEMENT COSTSABATEMENT POLICIESAGGREGATE EMISSIONSALLOCATIONAPPROACHATMOSPHEREAVAILABILITYBALANCECALCULATIONCARBONCARBON CAPTURECARBON EMISSIONSCARBON EMISSIONS FROM FOSSILCARBON PRICESCDFCLIMATECLIMATE CATASTROPHECLIMATE DAMAGESCLIMATE POLICYCO2COALCONVERGENCECOOLING SYSTEMSCOST FUNCTIONSCOST SAVINGSDIESELECONOMIC DYNAMICSELASTICITYELECTRIC VEHICLESEMISSIONEMISSION INTENSITYEMISSION LEVELEMISSION LEVELSEMISSION RATESEMISSION REDUCTIONEMISSIONS INTENSITYEMISSIONS LEVELSEMISSIONS PATHEMISSIONS PRICESEMISSIONS RATESENERGY CONSUMPTIONENERGY COSTSENERGY ECONOMICSENERGY INTENSITYENERGY PRICESENERGY SOURCEENERGY SUPPLYENERGY USEENVIRONMENTALENVIRONMENTAL COSTSENVIRONMENTAL DAMAGESENVIRONMENTAL ECONOMICSENVIRONMENTAL POLICYFOSSIL ENERGYFOSSIL FUELSFUELFUEL COSTGASGAS EMISSIONSGASOLINEGHGGHGSGLOBAL EMISSIONSGREENHOUSEGREENHOUSE GASGREENHOUSE GAS EMISSIONSGREENHOUSE GASESINCOMEINFRASTRUCTURE COSTINFRASTRUCTURE DEVELOPMENTINFRASTRUCTURE INVESTMENTINFRASTRUCTURE PROJECTSINVESTMENT DECISIONSIRREVERSIBILITYLOWER COSTSMARGINAL COSTMARGINAL COSTSMODELLING ENERGYMOTOR VEHICLEMOTOR VEHICLESOPTION VALUEPOLICY MAKERSPOLLUTIONPOWERPOWER PLANTSPOWER PRODUCTIONPRESENT VALUEPRIVATE TRANSPORTPROBABILITY DENSITYPROBABILITY DISTRIBUTIONPROBABILITY DISTRIBUTIONSPUBLIC TRANSPORTPUBLIC TRANSPORT SYSTEMSREDUCING EMISSIONSRENEWABLE ENERGYRENEWABLE ENERGY SOURCESRETROFIT DECISIONSRETROFIT OPTIONRETROFITTINGROADROAD EXPANSIONROADSSEQUESTRATION TECHNOLOGIESSTOCHASTIC PROCESSSUPPLY SIDETOTAL EMISSIONSTRANSPORTTRANSPORT SYSTEMSTRUEUNCERTAINTY ANALYSISVALUE OF ENERGYVEHICLE FLEETSWINDWorld Bank10.1596/1813-9450-6430