Friday, December 12, 2008

Uncertainty in climate change policy

"Higher uncertainty (around the same expected price) will increase the value of delaying investment since the next period may bring further info that will influence how you invest. Thus cap-and-trade systems may tend to delay investment relative to a carbon tax with the same expected price path.

The next logical question is whether the costs of this uncertainty are big or small. I tend to think the costs are small given the ready availability of hedging instruments for energy and commodity prices. Remember, the ‘cost of uncertainty’ is not necessarily a delay in investment; it could just be the economic cost (transaction or opportunity) of any hedging strategy."

(More from Common Tragedies)

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