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2011

[2011-01] Long Run Trends in Energy-Related External Costs
Roger Fouquet

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This paper considers how energy-related external costs change through time. It focuses on one of the key periods in the history of energy. After a period of declining coal prices and soaring consumption which fuelled the Second Industrial Revolution, the nineteenth century British economy was externalising the social costs of energy production and consumption on a massive scale. Rising from 25% in the 1820s, an estimated 60%-70% of the average social costs of coal were externalised in the 1880s, imposing damages close to 20% of GDP. The eventual decline in air pollution concentration (around 1900) occurred fifty years later than was broadly socially optimal. This experience highlights the evolution of the demand for and supply of environmental quality in the context of economic growth, and the nature of related market and government failures, implying the necessity for adaptation rather than encouraging mitigation. This experience may offer lessons for climate analysis and policy-making.
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2010

[2010-18] ICT Applications in the Research for Environmental Sustainability
Aline Chiabai, Dirk Rübbelke and Lisa Maurer

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Whether Information and Communication Technology (ICT) constitutes a threat to or a cure for environmental deterioration is a matter of controversy. Empirical evidence on the impacts of ICT is rare, so few generalisable lessons can be drawn. This study addresses precisely this critique by providing empirical results on the role of ICT in research for environmental sustainability. The application of ICT in research is generally regarded as a way to exploit such technology in favour of the environment. Our analysis shows that the use of ICT in environmental research is of great importance in the scientific community, but it can also play a crucial role in the policy context, as well as in the business sector.

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[2010-17] The Determinants of Energy Efficiency Investments in the U.S.
Luis Mari Abadie, Ramon Arigoni Ortiz and Ibon Galarraga

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This paper analyses decisions on energy efficiency (EE) investments by small and medium manufacturing enterprises in the U.S. which have received assessment from the Department of Energy (DoE). The results confirm the importance of payback time and investment costs as the main determining factors in deciding whether to invest in energy efficiency. This behaviour is mantained over time. Such investment recommendations are frequently not implemented even though they apparently entail major advantages and give rise to considerable energy savings. The data show results which are compatible with a series of elementary valuation processes (limited by the availability of information), far removed from other, more academically ambitious methods such as Net Present Value (NPV) and the Real Options (RO) method. The paper analyses the impact of the physical situation of firms in line with their geographical locations in different US states, and changes over time from 1984 to 2008, i.e. 25 years of information. Finally, the paper examines the different levels of effectiveness of participating centres in getting firms to decide to make the investments proposed. EE investment decisions are analysed here using Logit models whose parameters are calibrated on the basis of the information held in the Industrial Assessment Centres (IAC) database. The results shed some light on impact assessment and suggest various policies for promoting investment in EE.

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[2010-16] The Health Effects of Climate Change: A Survey of Recent Quantitative Research
Margherita Grasso, Matteo Manera, Aline Chiabai and Anil Markandya

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In recent years there has been considerable scientific and public debate on climate change and its direct and indirect effects on human health. According to the World Health Organization (WHO, 2006), some 2.5 million people die every year from non-infectious diseases directly attributable to environmental factors such as air pollution, stressful conditions in the workplace, exposure to chemicals such as lead, and exposure to environmental tobacco smoke. Changes in climatic conditions and climate variability can also affect human health both directly and indirectly, via changes in biological and ecological processes that influence the transmission of several infectious diseases (WHO, 2003). In the past fifteen years a large amount of research on the effects of climate changes on human health has addressed two fundamental questions (WHO, 2003). First, can historical data be of any help in revealing how short-run or long-run climate variations affect the occurrence of infectious diseases? Second, is it possible to build more accurate statistical models which are capable of predicting the future effects of different climate conditions on the transmissibility of particularly dangerous infectious diseases? The primary goal of this paper is to review the most relevant contributions which have directly tackled those questions, both with respect to the effects of climate changes on the diffusion of non-infectious and infectious diseases. Specific attention will be drawn on the methodological aspects of each study, which will be classified according to the type of statistical model considered. Additional aspects such as characteristics of the dependent and independent variables, number and type of countries investigated, data frequency, time period spanned by the analysis, and robustness of the empirical findings are examined.

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[2010-15] Local and Global Externalities, Environmental Policies and Growth
Karen Pittel and Dirk Rübbelke

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The paper analyzes the implications of local and global pollution when two types of abatement activities can be undertaken. One type reduces solely local pollution (e.g., use of particulate matter filters) while the other mitigates global pollution as well (e.g., application of fuel saving technologies). In the framework of a 2-country endogenous growth model, the implications of different assumptions about the degree to which global externalities are internalized are analyzed. Subsequently, we derive policy rules adapted to the different scenarios. Special attention is paid to pollution, growth and optimal policy in the case of asymmetric internalization.

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[2010-14] Competing Ecosystem Services: an Assessment of Carbon and Timber in the Tropical Forests of Central America
Kaysara Khatun

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The Millennium Ecosystem Assessment (MEA 2005) has classified a number of ecosystems good and services (EGS) provided by tropical forests, namely cultural, provisioning, regulatory and support services. The primary focus of this paper is to carry out an economic assessment by comparing the financial costs and returns of selected EGS, namely carbon and timber in the tropical forests of Central America. Timber is unlike the other EGS provided by forests in that it competes with the other services, i.e. biodiversity, recreation and water services. Carbon storage is the non-timber value most often included in forest accounts and can be equated directly with timber available in terms of biomass content.

The study provides a quantitative appraisal of the carbon and timber stocks and flows of tropical (primary) forests and the associated trade-offs by evaluating them simultaneously using data and market values from a number of sources. The provision of reliable and accurate estimates of the economic value of these services is crucial to plan adequate conservation policies that encourage the protection and sustainable management of tropical forests such as those under REDD/REDD+. Results indicate that the economic return for managing natural forests is influenced by timber and carbon prices as well as the discount rate applied. Timber on face value is the better land use option; however, there are many issues that need to be considered when valuing timber, especially regarding the management regimes. Revenues under REDD/ REDD+ option would be higher if co-benefits, which include monies from the sustainable extraction of timber under Sustainable Forestry Management (SFM) are considered.


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[2010-13] Economic Assessment of Forest Ecosystem Services Losses: Cost of Policy Inaction
Aline Chiabai,Chiara Travisi,Anil Markandya,Helen Ding and Paulo Nunes

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This paper presents a bottom-up methodological framework for estimating some of the key ecosystem services provided by forests biomes worldwide. We consider the provision of wood and non-wood forest products, recreation and passive use, and forests’ contribution to climate regulation in terms of carbon sequestration capacity. The valuation framework derives per hectare estimates by applying meta-analysis, value transfer and scaling up procedures in order to control for existing heterogeneities across world regions and forest biomes. The first part of the study estimates stock values per hectare for each forest ecosystem service in the baseline year 2000 and in the year 2050. Carbon stocks represent, in general, the highest value per hectare, followed by provisioning services, passive use and recreational values. The second part provides an estimation of the welfare loss (or gain) associated with policy inaction in the period 2000-2050 leading to a change in the forest area. Welfare results are mixed and require a careful interpretation. In different world regions, no policy initiative can results in both gains and losses, which appear to be sensitive to the use of lower or upper bounds values per hectare.

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[2010-12] Classifying Ecosystem Services for Economic Valuation: The case of forest water services
Elena Ojea, Julia Martin-Ortega and Aline Chiabai

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Since the release of the Millennium Ecosystem Approach (MEA), the number of studies valuing ecosystem services has grown. As a consequence of this growing literature, different interpretations exist on the classification of services as derived from MEA, and several studies have argued that this may not be the most appropriate framework when the aim of the analysis is economic valuation. The present paper contributes to this debate by reviewing and comparing these critical views in order firstly to clarify the existing confusion in the terminology and interpretations; and secondly to shed some light on a desirable classification and conceptualization of ecosystem services for valuation. To illustrate this, we present an examination of existing primary valuation studies of water related services provided by tropical forests, which we analyze under the MEA classification framework and compare it with an output-based classification, in which the service is defined in terms of its benefits (outputs) to humans. Our results support the idea that an output-based classification should provide more accurate values and could help avoid certain problems such as double accounting and potential underestimation of services values.

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[2010-11] The DICER Model: Methodological Issues and Initial Results
Ramon Arigoni Ortiz, Alexander Golub,Oleg Lugovoy, Anil Markandya and James Wang

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This paper introduces DICER, a model for the integrated assessment of climate – economy interactions within an optimal growth framework developed based on the structure of the DICE2007 model. We present the methodological differences introduced so far in DICER and some preliminary results of its deterministic version. We observe interesting results in comparison to other IAMs, such as (i) lower peak temperatures; (ii) radiative forcing differences; (iii) differences in control rates; and (iv) sensitivity of results to parameters such as climate sensitivity. A further innovation of this work has been to account for uncertainty and risk through an application of option pricing. The method allows for a simple representation of the risks through measures of volatility in the damages and abatement costs and shows that taking these factors into account lowers maximum mean temperatures by about 0.5oC. We also present some methodological issues that need to be dealt with in the near future in DICER.

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[2010-10] Energy Supply and the Sustainability of Endogenous Growth
Karen Pittel and Dirk Rübbelke

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The paper provides an introduction to energy and, respective resource use within the framework of endogenous growth models. We provide an overview of different modeling approaches as well as intuition with respect to the results obtained. We consider the source problem, i.e. the supply of energy, as well as the sink problem, i.e. pollution generated by the consumption of energy resources. The introduction to the theoretical framework shortly discusses the use of neoclassical versus endogenous growth models and also points to the implications of the different types of endogenous growth approaches. We additionally give an introduction to CGE-models that include energy use and present an example of a numerical solvable model in detail. The paper closes with a look at possible future research.

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[2010-09] The Sustainability of `Sustainable´ Energy Use: Historical Evidence on the Relationship between Economic Growth and Renewable Energy
Roger Fouquet

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Understandably, focus on a transition to a low carbon economy has overshadowed what happens when the transition has been completed. This paper tries to offer lessons about the very long run aspects of a future economy reliant predominantly on renewable energy sources. The evidence is based on past economies and civilizations and their experiences of economic expansion driven by renewable energy resources. The paper proposes that economies around the world, since antiquity, have managed to survive, and even develop and grow driven by renewable energy sources. Successful long run economic growth depended on sound management of demand, supply and trade of woodfuel. Where governments failed to develop appropriate policies, growth and development was severely constrained. Despite the uncertainty about the future, this paper proposes that researchers start to consider the nature of long run economic growth and appropriate policies within renewable energy systems.

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[2010-08] Impacts of Climate Change on European Critical Infrastructures: The Case of the Power Sector
Dirk Rübbelke and Stefan Vögele

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Anthropogenic emissions of greenhouse gases cause climate change and this change in turn induces various direct impacts, e.g., changes in regional weather patterns. The frequency of heat waves and droughts in Europe is likely to rise. Yet, beyond these immediate effects of climate change, there are more indirect effects: Droughts may cause water scarcity and a lack of water supply which in turn would affect further sectors and critical infrastructures. A rising lack of water supply for cooling purposes, for example, will negatively affect electricity generation in power plants.
In this paper we analyse such interplays between climate-change affected sectors. We investigate whether and to which extent power generation and supply in Europe is threatened by climate change because of the higher risk of water supply shortages due to more frequent drought and heat-wave incidences. Our proposed approach cannot only be applied to analyse the climate change effects on individual power plant sites or the overall economy but also on electricity exchanges between countries.

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[2010-07] Optimal Abandonment of Coal-Fired Stations in the EU
Luis M. Abadie, Mikel González-Eguino and José M. Chamorro

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Carbon-fired power plants could face some difficulties in a carbon-constrained world. The traditional
advantage of coal as a cheaper fuel may decrease in the future if CO2 allowance prices start to increase.
This paper seeks to answer empirically the most drastic question that an operating coal-fired power plant
may ask itself: under what conditions would it be optimal to abandon the plant and obtain its salvage
value? We try to assess this question from a financial viewpoint following a real option approach at firm
level so as to attract the interest of utilities and the broader investment community. We consider the
specific case of a coal-fired power plant that operates under restrictions on carbon dioxide emissions in
an electricity market where gas-fired plants are considered as marginal units. We also consider three
sources of uncertainty or stochastic variables: the coal price, the gas price and the emission allowance
price. These parameters are derived from future markets and are used in a three-dimensional binomial
lattice to assess the value of the option to abandon. Our results (and sensitivity analysis) show the
conditions that have to be met for the abandonment option to be exercised. This option to abandon coalfired
plants is, however, hardly likely to be exercised if plants can operate as peaking plants. However,
the decision may go differently in different circumstances, such as high CO2 allowance prices, very low
volatility of allowance price or a decrease in the price of gas. The decision is also influenced by the
remaining lifetime of the plant and its thermal efficiency. In any case the price of CO2 will work to bring
forward the decision to abandon in older and less efficient coal-fired plants, which are less likely to be
retrofitted in the future.

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[2010-06] Evaluating the Role of Energy Efficiency Labels: the Case of Dish Washers
Ibon Galarraga, Mikel González-Eguino and Anil Markandya

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This article uses the hedonic approach to estimate how much is paid for the energy efficiency label on the dishwasher market in Spain. The estimated figure is 15.6% of the final price. This accounts for about 80€ of the average price. We use this estimate combined with a demand systems to obtain own and cross price elasticities of demand, vital for policy designing and analysis. This is done by combining the use of the estimate with the Quantity Based Demand System (QBDS) model to completely determine the demand function for different dishwashers. Finally, the elasticity results are compared with the figure calculated using the Linear Almost Ideal Demand System (LA/AIDS). The comparison of the results confirms that the QBDS model is easier to handle and less data demanding than the LA/AIDS model but provide reliable estimates of demand elasticities.

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[2010-05] The Slow Search for Solutions: Lessons from Historical Energy Transitions by Sector and Service
Roger Fouquet

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This paper reviews past energy transitions by sector and service to identify features that may be useful for anticipating future transitions. As the United Kingdom was the first to make the transition from traditional energy sources to fossil fuel, its experiences may offer a unique perspective of relevance for a possible transition to a low carbon economy. Although often considered a single event, the transition from traditional energy sources to fossil fuels was complex and involved numerous services and sectors at different times between 1500 and 1920.The main drivers for the energy transitions were the opportunity to produce cheaper or better energy services. In a majority of cases, the successful new energy source or technology provided the same service (i.e. heating, power, transport or light) with superior or additional characteristics (e.g. easier, cleaner or more flexible to use). The existence of a niche market willing to pay more for these characteristics enabled the new energy source and technology to be refined gradually until they could compete with the incumbent energy source. Nevertheless, this implied that, on average, the whole innovation chain took more than one hundred years and the diffusion phase nearly fifty years. In the same way, since low-carbon energy sources and technologies are valued for their low climate impact, they will be able to develop gradually until they can compete with fossil fuels. However, for a transition to take place, low carbon energy sources and technologies will have to provide cheaper energy services – possibly helped by carbon taxes or tradable permit schemes. And, based on past experiences, a complete transition to a low carbon economy is likely to be very slow.

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[2010-04] Environmental Concerns in Water Pricing Policy:  an Application of Data Envelopment Analysis (DEA)
Giacomo Giannoccaro and Julia Martin-Ortega

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Water management is subject to conflicting economic and environmental objectives, and policymakers require a clear overview of the different outcomes derived from different water management options. The aim of this paper is to assess the efficiency of several irrigation water pricing policies with a special focus on their environmental implications. Irrigation is chosen here as a crucial sector of water use in large parts of southern Europe, where pressure on the resource is expected to increase due to climate change. A novel methodological approach for performing an ex ante analysis of alternative water pricing policies is proposed here, where environmental and technical performance are simultaneously considered. This approach takes place in two steps: the first is a simulation of alternative water policies through a mathematical programming model, and the second is the analysis of results by using the Data Envelopment Analysis (DEA) technique. A case study is applied in Puglia (southern Italy), where irrigation is the primary factor of strategic relevance for policymakers regarding water management. Our results show that on the one hand alternative pricing policies perform similarly in terms of technical efficiency and environmental efficiency. On the other hand, inefficiency appears to depend mainly on technical rather than environmental concerns. According to the assigned weights, through the DEA technique, the highest improvement for inefficient options may be obtained by better labour use. We conclude that the proposed approach may be a comprehensive and versatile framework for water policy analysis, offering a tool for supporting the decision-making process.

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[2010-03] Divergences in the Long Run Trends in the Price of Energy and of Energy Services
Roger Fouquet

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This paper presents new evidence on the very long run trends in the price of energy and energy services, such as heat, power, transport and light. The paper has two purposes. First, it shows that, in general, there was an upward trend in average energy prices leading up to the Industrial Revolution and a decline afterwards, associated with the shift from traditional energy sources to fossil fuels. At the end of the nineteenth and early twentieth centuries, however, average energy prices did rise, reflecting (not rising resource scarcity but) greater value to consumers, as they shifted to energy sources that provided the desired services more efficiently. Second, the paper highlights the dangers of focussing on the price of energy, rather than the price of energy services, when considering the long run. The price of energy ignores the major technological improvements that have occurred and that benefit the consumer. This failure to focus on the services is likely to lead to incorrect estimates of consumer responsiveness to changes in price and income. This paper suggests that the inclusion of service prices and consumption variables would lead to more reliable models of long run energy demand and forecasts of carbon dioxide emissions.

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[2010-02] Carbon leakage and the future of Old Industrial Regions after Copenhagen
Mikel González-Eguino, Ibon Galarraga and Alberto Ansuategi

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CO2 prices will continue to differ from one country to another for a long time, even if a global post-Kyoto agreement is achieved in the near future. The non-homogeneous nature of climate policies may decrease the competitiveness of some industries with the risk of relocation of activities due to carbon leakage. One of most exposed industries in Europe is iron and steel, as it is highly CO2-intensive and relatively open to international trade. Most studies estimate a leakage of up to 20% as a consequence of all the industrial production activities that are expected to be relocated, and a level of relocation ranging from 1.5% to 35% specifically for the iron and steel sector. This might seem a relatively small macroeconomic impact if measured at country or EU level. However, the picture may be quite different if the analysis is conducted at sub-national level. Therefore, one could argue that there is an important gap in the literature as the relevant studies are applied to a large geographical scale when the fact is that in Europe this industry is highly concentrated in certain specific regions, i.e. the so-called Old Industrial Regions (OIR). This paper seeks to analyse the impact that different levels of relocation of the iron and steel industry in the OIRs will have as a consequence of climate policy. This is done using an AGE (Applied General Equilibrium) model. The results show that although these effects may be diluted from a national perspective, the impact for incumbent regions may be very large, and may in fact significantly reduce their GDPs. Another important outcome emerges when the costs of CO2 reduction derived from industry relocation and from cost-effective policies are compared. Although relocation of industrial activity (i.e. forced output change) can reduce CO2, the cost is very high compared with other options (e.g. induced input substitution). These results can help national and regional policy makers understand the necessary linkages between their environmental and industrial policies.

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[2010-01] The Health Impacts of Climate Change: A Study of Cholera in Tanzania
Sara L. M. Trærup, Ramon Arigoni Ortiz  and Anil Markandya

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Increased temperatures and changes in patterns of rainfall as a result of climate change are widely recognized to entail serious consequences for human health, including the risk of diarrheal diseases. Indeed, there is strong evidence that temperature and rainfall patterns affect the disease pattern. This paper presents the first study that links the incidence of cholera to environmental and socioeconomic factors and uses that relationship to predict how climate change will affect the incidence of cholera. Specifically, the paper integrates historical data on temperature and rainfall with the burden of disease from cholera in Tanzania, and uses socioeconomic data to control for impacts of general development on the risk of cholera. Based on these results we estimate the number and costs of additional cholera cases and deaths that can be attributed to climate change by year 2030 in Tanzania. The analyses are based on primary data collected from the Ministry of Health, Tanzania, and the Tanzania Meteorological Agency. The result shows a significant relationship between cholera cases and temperature and predicts an increase in the initial risk ratio for cholera in Tanzania in the range of 23 to 51 percent for a 1 degree Celsius increase in annual mean temperature. The cost of reactive adaptation to cholera attributed to climate change impacts by year 2030 in Tanzania is projected to be in the range of 0.02 to 0.09 percent of GDP for the lower and upper bounds respectively. Total costs, including loss of lives are estimated in the range of 1.4 to 7.8 percent of GDP by year 2030. Lastly, costs of additional cholera cases and deaths attributed to climate change impacts in Tanzania by the year 2030 largely exceed the costs of preventive measures such as household chlorination.

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2009

[2009-11] Optimal Investment in Energy Efficiency under Uncertainty
Luis M. Abadie, José M. Chamorro, Mikel González-Eguino

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This paper deals with the optimal time to invest in an energy efficiency improvement. There is a broad
consensus that such investments quickly pay for themselves in lower energy bills and spared emission
allowances. However, investments that at first glance seem worthwhile are frequently not undertaken. Our
aim is to shed some light on this issue. In particular, we try to assess these projects from a financial point
of view so as to attract sufficient interest from the investment community. We consider the specific case of
a firm or utility already in place that consumes huge amounts of coal and operates under restrictions on
carbon dioxide emissions. In order to reduce both coal and carbon costs the firm may undertake an
investment to enhance energy efficiency. We consider three sources of uncertainty: the fuel commodity
price, the emission allowance price, and the overall investment cost. The parameters of the coal price
process and the carbon price process are estimated from observed futures prices. The numerical
parameter values are then used in a three-dimensional binomial lattice to assess the value of the option to
invest. As usual, maximising this value involves determining the optimal exercise time. Thus we compute
the trigger investment cost, i.e. the threshold level below which immediate investment would be optimal.
A sensitivity analysis is also undertaken. Our results go some way towards explaining the so-called energy
efficiency paradox.

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