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Incorporating Investment Uncertainty into Greenhouse Policy Models

Greenhouse gas policy decisions require comprehensive understanding of atmospheric, economic, and social impacts. Many studies have considered the effects of atmospheric uncertainty in global warming, but economic uncertainties, have received Less analysis. We consider a key component of economic uncertainty: the return on investments in new technologies. Using a mathematical! programming model, we show that ignoring uncertainty in technology investment policy may lead to decreases as great as 2 percent in overall expected economic activity in the U.S. with even higher losses in possible future scenarios. These results indicate that both federal and private technology investment policies should be based on models explicitly incorporating uncertainty.

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Energy Specializations: Energy Investment and Finance – Public and Private Risks, Risk Management; Electricity – Markets and Prices ; Energy and the Environment – Policy and Regulation

JEL Codes:
D81 - Criteria for Decision-Making under Risk and Uncertainty
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Greenhouse gas policy, uncertainty, investment, technology change, stochastic model

DOI: 10.5547/ISSN0195-6574-EJ-Vol17-No1-5

Published in Volume17, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.