Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 249: Using Ex Post Data to Estimate the Hurdle Rate of Abatement Investments - An Application to the Swedish Pulp and Paper Industry and Energy Sector
Åsa Löfgren (), Katrin Millock () and Céline Nauges ()
Additional contact information
Åsa Löfgren: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG
Katrin Millock: Université Paris 1 Panthéon-Sorbonne, CNRS, Centre d’Economie de la Sorbonne, Postal: 106/112 Bd. de l’Hôpital, 75647 Paris Cedex 13, France
Céline Nauges: UMR LERNA-Université de Toulouse, Manufacture des Tabacs, Postal: 21, Allée de Brienne, 31000 Toulouse, France
Abstract: We propose a method for estimating hurdle rates for firms’ investments in pollution abatement technology, using ex post data. The method is based on a structural option value model where the future price of polluting fuel is the major source of uncertainty facing the firm. The econometric procedure is illustrated using a panel of firms from the Swedish pulp and paper industry, and the energy and heating sector from 2000 to 2003. The results indicate a hurdle rate of investment of almost 3 in the pulp and paper industry and almost 4 in the energy and heating sector.
Keywords: option value; fuel price uncertainty; investment decision; pollution abatement; panel data pulp and paper industry; energy and heating sector
JEL-codes: C33; D81; O33; Q48; Q53
30 pages, March 21, 2007
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