Climate Cost Uncertainty, Retrofit Cost Uncertainty, and Infrastructure Closedown: A Framework for Analysis

32 Pages Posted: 20 Apr 2016

See all articles by Jon Strand

Jon Strand

World Bank

Sebastian Miller

Inter-American Development Bank (IDB)

Date Written: February 1, 2010

Abstract

Large and energy-intensive infrastructure investments with long life times have substantial implications for climate policy. This study focuses on options to scale down energy consumption and carbon emissions now and in the future, and on the costs of doing so. Two ways carbon emissions can be reduced post-investment include retrofitting the infrastructure, or closing it down. Generally, the presence of bulky infrastructure investments makes it more costly to reduce emissions later. Moreover, when expected energy and environmental costs are continually rising, inherent biases in the selection processes for infrastructure investments lead to excessive energy intensity in such investments. Thus great care must be taken when choosing the energy intensity of the infrastructure at the time of investment. Simulations indicate that optimally exercising the retrofit option, when it is available, reduces ex ante expected energy consumption relative to the no-option case. Total energy plus retrofit costs can also be substantially reduced, the more so the larger is ex ante cost uncertainty. However, the availability of the retrofit option also leads to a more energy intensive initial infrastructure choice; this offsets some, but usually not all, of the gains from options for subsequent retrofitting.

Keywords: Energy Production and Transportation, Transport Economics Policy & Planning, Climate Change Mitigation and Green House Gases, Climate Change Economics, Environment and Energy Efficiency

Suggested Citation

Strand, Jon and Miller, Sebastian, Climate Cost Uncertainty, Retrofit Cost Uncertainty, and Infrastructure Closedown: A Framework for Analysis (February 1, 2010). World Bank Policy Research Working Paper No. 5208. Available at SSRN: https://ssrn.com/abstract=1559725

Jon Strand (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Sebastian Miller

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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