Infrastructure Investments under Uncertainty with the Possibility of Retrofit:
Theory and Simulations
by Jon Strand (DECEE), Sebastian Miller (IDB) and Sauleh Siddiqui (U of Maryland)
Presented by Sebastian Miller
Thursday, November 4, 12.30-2 pm
This paper analyzes energy-intensive infrastructure investments with long life times, and their implications for long-term fossil fuel consumption, under uncertainty about future energy, environmental and retrofit costs. Such investments absorb and define a large fraction of climate emissions in expanding (emerging) economies, and their management is key to controlling future global greenhouse gas emissions. In our model, once infrastructure investments have been sunk, the implied emissions can “later” be reduced only by retrofitting or closing down the infrastructure, at an initially uncertain cost. Later retrofits reduce ex post energy consumption, but the possibility of retrofit increases ex ante emissions as the chosen infrastructure becomes more energy intensive. Our presented simulations show that various inefficiencies lead to excessive energy intensity of infrastructure investments, and emissions: a) when current infrastructure investments are not responsive to increased future energy prices; b) when correct energy and environmental prices are not accounted for in infrastructure and retrofit decisions; and c) when future retrofit possibilities and technologies are not adequately developed.
Sebastian Miller holds a PhD in economics from the University of Maryland, College Park, and an engineering degree and an MA in economics from the University of Chile, Santiago. He is currently Research Economist in the Southern Cone Department of the Inter-American Development Bank in Washington, DC, and will soon be moving to the IDB's Research Department as a Research Economist devoted to Climate Change. He has co-authored several journal papers and book chapters on environmental/sustainability issues, with a focus on Chile.
For further contact about the presentation and paper, contact Jon Strand (DECEE), 202-458-5122, firstname.lastname@example.org.