Photovoltaic installations and land allocation under uncertainty

A real option model is developed to examine the crucial factors affecting the agricultural firms’ decision to quit the production and rent out the land to a company building a PV power plant. The public policies in support of investments in renewable energies have created the conditions for a market regarding investments in PV installations in agricultural areas. The decision to switch offers to the agricultural firm and to society several economical, social and environmental benefits, representing sustainability. However, PV installations in agricultural areas require the allocation of a certain land area. By assigning a part of land to PV installations, thereby the area of land allocated to agricultural production decreases. Using a real option approach the trade-off between these two competing uses is studied. The real option approach is useful for the evaluation of decisions regarding PV installations since it takes into account the uncertainty regarding the agricultural commodities prices and the irreversibility of the decision taken by the agricultural firm. The results illustrate how uncertainty and irreversibility are important factors and determine the decision of the agricultural firm to switch. These results have implications for the design and implementation of decision-making processes regarding PV installations and land allocation

Testing innovation, employment and distributional impacts of climate policy packages in a macro-evolutionary systems setting

Climate policy has been mainly studied with economic models that assume representative, rational agents. However, it aims at changing behavior associated with carbon-intensive goods that are often subject to bounded rationality and social preferences, such as status and imitation. Here we use a macroeconomic multi-agent model with such features to test the effect of various policies on both environmental and economic performance. The model is particularly suitable to address distributional impacts of climate policies, not only because populations of many agents are included, but also as these are composed of different classes of households driven by specific motivations. We simulate various policy scenarios, combining in different ways a carbon tax, a reduction of labor taxes, subsidies for green innovation, a price subsidy to consumers for less carbon-intensive products, and green government procurement. The results show pronounced differences with those obtained by rational-agent model studies. It turns out that demand-oriented subsidies lead to lower unemployment and higher output, but perform less well in terms of carbon emissions. The supply-oriented subsidy for green innovation results in a significant reduction of carbon emissions with a slight reduction of unemployment.Series: WWWforEurop

Policy responses by different agents/stakeholders in a transition: Integrating the Multi-level Perspective and behavioral economics

This short paper considers all possible stakeholders in different stages of a sustainability transition and matches their behavioral features and diversity to policies. This will involve an assessment of potential or expected responses of stakeholders to a range of policy instruments. Following the Multi-Level Perspective framework to conceptualize sustainability transitions, we classify the various transition policies at niche, regime and landscape levels. Next, we offer a complementary classification of policies based on a distinction between social preferences and bounded rationality. The paper identifies many barriers to making a sustainability transition and how to respond to them. In addition, lessons are drawn from the case of Denmark. The detailed framework and associated literature for the analysis was discussed in Milestone 31 of the WWWforEurope project (Gazheli et al., 2012).Series: WWWforEurop

How big is big enough? Toward a sustainable future by examining alternatives to the conventional economic growth paradigm

This study addresses how the sustainability crisis may be overcome by using alternatives to the conventional economic growth paradigm. Based on a literature review, the paper identifies and discusses three alternatives, namely negative, zero and positive economic growth. These alternatives are compared from a feasibility and policy perspective in relation to the transition toward sustainable development. The three alternatives are associated with very far‐reaching sets of policies that have different focal points with regard to how the paradigm shift from the conventional growth paradigm can be realized. All these alternatives, however, challenge the effectiveness of market forces. The shortcomings of the alternatives (resistance to voluntary transition with negative or zero growth, no proper consideration of the rebound effect for positive growth) hinder the transition and must be further addressed by policy‐makers in public and private sectors, as well as by civil society

Achieving sustainability transitions: Behavioral barriers, limits to green growth, and investments under uncertainty

Está ampliamente aceptado que es necesaria una transición urgente hacia la sostenibilidad. El cómo hacer esa transición está intensamente en discusión. Está claro, sin embargo, que implicará grandes cambios radicales, socio-­‐técnicos, que van mucho más allá de enfoques tradicionales de políticas públicas. Esta tesis doctoral aborda este reto a través de tres estudios distintos y complementarios. El primer estudio está motivado por el hecho de que las políticas de transición -­‐ en términos de eficacia, equidad y eficiencia -­‐ dependen en gran medida del modelo subyacente de la conducta individual. Sólo un modelo empíricamente fundado en la acción individual y en la motivación puede garantizar el diseño de las políticas de transición adecuadas. Un obstáculo potencial para una transición hacia la sostenibilidad pueden ser las barreras de comportamiento para el cambio. Los diferentes actores involucrados tienen sus propios intereses y tratarán de mantener cualquier posición de poder. Ideas acerca de la racionalidad limitada, la interacción social y el aprendizaje pueden contribuir a unas políticas más eficaces en afrontar las barreras y oportunidades para así realizar una transición hacia la sostenibilidad. Con el fin de llegar a las recomendaciones políticas, me centro en las características de comportamiento tanto a nivel de organización como individual, prestando atención a cuestiones como el monopolio comercial, imprevistos en los sistemas de innovación o interacciones de red, mientras intento conectar dichas cuestiones para el diseño de políticas públicas. El análisis combina puntos de vista de la literatura sobre las transiciones de sostenibilidad, "economía conductual-­‐ambiental", y fundamentos de comportamiento de aprendizaje e innovación. A continuación, analizo el conflicto potencial entre crecimiento económico y mitigación del cambio climático. Utilizo un enfoque basado en los sectores economicos para analizar la relación entre las emisiones de CO2, por un lado utilizando el dólar de producción y por el otro el crecimiento de la producción económica y la productividad del trabajo. Esto nos permite investigar si el crecimiento verde -­‐ combinando el crecimiento económico con la sostenibilidad ambiental -­‐ es factible. Una conclusión principal es que, a pesar de las políticas climáticas realizadas hasta ahora, desarrolladas bajo el protocolo de Kyoto, sectores relativamente limpios no parecen ser más productivos que los más sucios, y tampoco muestran un mayor crecimiento de la productividad. De hecho, los sectores asociados a la alta intensidad de emisiones crecieron más en términos absolutos que aquellos con baja intensidad. La quota del primer tipo de sector aumentó, lo que sugiere que el desarrollo verde requiere un ritmo extremadamente rápido de descarbonización (para permitir el crecimiento verde), o la economía en su conjunto para reducir el tamaño (disminución verde). Un hallazgo importante adicional es que el crecimiento sectorial a largo plazo, tal y como se expresa por un cambio en el valor añadido, no parece estar correlacionado positivamente con la intensidad de las emisiones de carbono. En el último estudio, examino la inversión óptima por parte de una sociedad o empresa mediante la diversificación de la inversión en dos tecnologías de energía renovable con distintas ratios de aprendizaje y costes iniciales, como la energía solar fotovoltaica y la energía eólica. Los resultados muestran la importancia de la tasa de aprendizaje: afecta a la anticipación sobre la opción de invertir y reduce el umbral crítico para su ejercicio o para un más alto coste de producción inicial. A más capital invertido, mayor es el aprendizaje que estimula el ejercicio temprano de la opción de invertir, debido a un efecto de reducción de costes. Una mayor incertidumbre en los precios de la energía o de los costes de la tecnología pospone la opción de invertir. A través de las subvenciones, los gobiernos implícitamente protegen a los inversores contra las fluctuaciones de precios y la incertidumbre. Un resultado inesperado de este estudio es que, a pesar de que la inversión tanto en energía solar como en eólica puede ser rentable en condiciones particulares de incertidumbre de precios y costes, la estrategia teóricamente óptima suele ser invertir en una sola tecnología, es decir, en solar o eólica, en función de sus relativos costes y ratios de aprendizaje iniciales. Esto sugiere que la práctica de la diversificación de las energías renovables en la mayoría de los países puede ser una estrategia equivocada. Sin embargo, tal vez ciertas motivaciones para la diversificación no están insuficientemente cubiertas por nuestro modelo, por lo que sugerimos seguir investigando mediante el uso de modelos más complejos.It is widely agreed that a transition to sustainability is urgently needed. How to make such a transition is strongly debated. It is clear, though, that it will involve radical, large-scale socio-technical changes that go well beyond traditional policy approaches. This PhD thesis addresses this challenge through three distinct, complementary studies. The first is motivated by the fact that the performance of transition policies – in terms of effectiveness, equity and efficiency – depend very much on the underlying model of individual behavior. Only an empirically founded model of individual action and motivation can guarantee the design of adequate transition policies. A potential obstacle to a sustainability transition can be behavioral barriers to change. The different stakeholders involved in a transition have their own interests and will try to maintain any power position. Insights about bounded rationality, social interaction and learning can contribute to making transition polices more effective in addressing barriers and opportunities to realize a sustainability transition. In order to arrive at policy recommendations I focus on behavioral features of both individual and organizational level, paying attention to issues like lock-in, surprises in innovation systems, and network interactions, while trying to connect these to policy design. The analysis combines insights from the literatures on sustainability transitions, “environmental-behavioral economics”, and behavioral foundations of learning and innovation. Next, I consider the potential conflict between economic growth and climate change mitigation. This is done by developing a sector-based approach to analyze the relation between on the one hand CO2 emissions per dollar of output and on the other the growth in economic output and labor productivity. This allows us to investigate whether green growth – combining economic growth with environmental sustainability – is feasible. A main conclusion is that despite past climate policy, developed under the Kyoto protocol, relatively clean sectors do not seem to be more productive than dirtier ones, and neither show a higher productivity growth. In fact, sectors associated with high carbon intensity grew more in absolute terms than those with low carbon intensity. The share of the first type of sectors increased suggesting that green development requires an extremely rapid pace of decarbonization (to allow for green growth), or the economy as a whole to shrink (green decline). An important additional finding of this study is that longer-term sectoral growth, as expressed by a change in value added, does not seem to be positively correlated with carbon intensity. In a final study I examine optimal investment by a community or firm diversifying its investment in two renewable energy technologies with distinct learning rates and initial costs, like solar PV and wind electricity. The results show the importance of the learning rate: it affects anticipation of the option to invest in, and it reduces the critical threshold for exercising it, or for higher initial production cost. More capital invested, more learning stimulates earlier exercising of the option to invest, due to a cost reduction effect. More uncertainty in energy prices or technology costs postpones the option to invest. Through subsidies, governments implicitly protect investors against price fluctuations and uncertainty. A surprising message from this study is that although investing in both solar and wind may be profitable under particular conditions of price and cost uncertainty, the theoretically optimal strategy is generally investing in only one technology, that is, solar or wind, depending on their relative initial costs and learning rates. This suggests that the practice in most countries of diversifying renewable energy may be a wrong strategy. However, perhaps certain motivations for diversifying are not or insufficiently covered by our model, which suggests a need for further research employing more complex models

Achieving sustainability transitions: Behavioral barriers, limits to green growth, and investments under uncertainty

Está ampliamente aceptado que es necesaria una transición urgente hacia la sostenibilidad. El cómo hacer esa transición está intensamente en discusión. Está claro, sin embargo, que implicará grandes cambios radicales, socio-­‐técnicos, que van mucho más allá de enfoques tradicionales de políticas públicas. Esta tesis doctoral aborda este reto a través de tres estudios distintos y complementarios. El primer estudio está motivado por el hecho de que las políticas de transición -­‐ en términos de eficacia, equidad y eficiencia -­‐ dependen en gran medida del modelo subyacente de la conducta individual. Sólo un modelo empíricamente fundado en la acción individual y en la motivación puede garantizar el diseño de las políticas de transición adecuadas. Un obstáculo potencial para una transición hacia la sostenibilidad pueden ser las barreras de comportamiento para el cambio. Los diferentes actores involucrados tienen sus propios intereses y tratarán de mantener cualquier posición de poder. Ideas acerca de la racionalidad limitada, la interacción social y el aprendizaje pueden contribuir a unas políticas más eficaces en afrontar las barreras y oportunidades para así realizar una transición hacia la sostenibilidad. Con el fin de llegar a las recomendaciones políticas, me centro en las características de comportamiento tanto a nivel de organización como individual, prestando atención a cuestiones como el monopolio comercial, imprevistos en los sistemas de innovación o interacciones de red, mientras intento conectar dichas cuestiones para el diseño de políticas públicas. El análisis combina puntos de vista de la literatura sobre las transiciones de sostenibilidad, "economía conductual-­‐ambiental", y fundamentos de comportamiento de aprendizaje e innovación. A continuación, analizo el conflicto potencial entre crecimiento económico y mitigación del cambio climático. Utilizo un enfoque basado en los sectores economicos para analizar la relación entre las emisiones de CO2, por un lado utilizando el dólar de producción y por el otro el crecimiento de la producción económica y la productividad del trabajo. Esto nos permite investigar si el crecimiento verde -­‐ combinando el crecimiento económico con la sostenibilidad ambiental -­‐ es factible. Una conclusión principal es que, a pesar de las políticas climáticas realizadas hasta ahora, desarrolladas bajo el protocolo de Kyoto, sectores relativamente limpios no parecen ser más productivos que los más sucios, y tampoco muestran un mayor crecimiento de la productividad. De hecho, los sectores asociados a la alta intensidad de emisiones crecieron más en términos absolutos que aquellos con baja intensidad. La quota del primer tipo de sector aumentó, lo que sugiere que el desarrollo verde requiere un ritmo extremadamente rápido de descarbonización (para permitir el crecimiento verde), o la economía en su conjunto para reducir el tamaño (disminución verde). Un hallazgo importante adicional es que el crecimiento sectorial a largo plazo, tal y como se expresa por un cambio en el valor añadido, no parece estar correlacionado positivamente con la intensidad de las emisiones de carbono. En el último estudio, examino la inversión óptima por parte de una sociedad o empresa mediante la diversificación de la inversión en dos tecnologías de energía renovable con distintas ratios de aprendizaje y costes iniciales, como la energía solar fotovoltaica y la energía eólica. Los resultados muestran la importancia de la tasa de aprendizaje: afecta a la anticipación sobre la opción de invertir y reduce el umbral crítico para su ejercicio o para un más alto coste de producción inicial. A más capital invertido, mayor es el aprendizaje que estimula el ejercicio temprano de la opción de invertir, debido a un efecto de reducción de costes. Una mayor incertidumbre en los precios de la energía o de los costes de la tecnología pospone la opción de invertir. A través de las subvenciones, los gobiernos implícitamente protegen a los inversores contra las fluctuaciones de precios y la incertidumbre. Un resultado inesperado de este estudio es que, a pesar de que la inversión tanto en energía solar como en eólica puede ser rentable en condiciones particulares de incertidumbre de precios y costes, la estrategia teóricamente óptima suele ser invertir en una sola tecnología, es decir, en solar o eólica, en función de sus relativos costes y ratios de aprendizaje iniciales. Esto sugiere que la práctica de la diversificación de las energías renovables en la mayoría de los países puede ser una estrategia equivocada. Sin embargo, tal vez ciertas motivaciones para la diversificación no están insuficientemente cubiertas por nuestro modelo, por lo que sugerimos seguir investigando mediante el uso de modelos más complejos.It is widely agreed that a transition to sustainability is urgently needed. How to make such a transition is strongly debated. It is clear, though, that it will involve radical, large-scale socio-technical changes that go well beyond traditional policy approaches. This PhD thesis addresses this challenge through three distinct, complementary studies. The first is motivated by the fact that the performance of transition policies – in terms of effectiveness, equity and efficiency – depend very much on the underlying model of individual behavior. Only an empirically founded model of individual action and motivation can guarantee the design of adequate transition policies. A potential obstacle to a sustainability transition can be behavioral barriers to change. The different stakeholders involved in a transition have their own interests and will try to maintain any power position. Insights about bounded rationality, social interaction and learning can contribute to making transition polices more effective in addressing barriers and opportunities to realize a sustainability transition. In order to arrive at policy recommendations I focus on behavioral features of both individual and organizational level, paying attention to issues like lock-in, surprises in innovation systems, and network interactions, while trying to connect these to policy design. The analysis combines insights from the literatures on sustainability transitions, “environmental-behavioral economics”, and behavioral foundations of learning and innovation. Next, I consider the potential conflict between economic growth and climate change mitigation. This is done by developing a sector-based approach to analyze the relation between on the one hand CO2 emissions per dollar of output and on the other the growth in economic output and labor productivity. This allows us to investigate whether green growth – combining economic growth with environmental sustainability – is feasible. A main conclusion is that despite past climate policy, developed under the Kyoto protocol, relatively clean sectors do not seem to be more productive than dirtier ones, and neither show a higher productivity growth. In fact, sectors associated with high carbon intensity grew more in absolute terms than those with low carbon intensity. The share of the first type of sectors increased suggesting that green development requires an extremely rapid pace of decarbonization (to allow for green growth), or the economy as a whole to shrink (green decline). An important additional finding of this study is that longer-term sectoral growth, as expressed by a change in value added, does not seem to be positively correlated with carbon intensity. In a final study I examine optimal investment by a community or firm diversifying its investment in two renewable energy technologies with distinct learning rates and initial costs, like solar PV and wind electricity. The results show the importance of the learning rate: it affects anticipation of the option to invest in, and it reduces the critical threshold for exercising it, or for higher initial production cost. More capital invested, more learning stimulates earlier exercising of the option to invest, due to a cost reduction effect. More uncertainty in energy prices or technology costs postpones the option to invest. Through subsidies, governments implicitly protect investors against price fluctuations and uncertainty. A surprising message from this study is that although investing in both solar and wind may be profitable under particular conditions of price and cost uncertainty, the theoretically optimal strategy is generally investing in only one technology, that is, solar or wind, depending on their relative initial costs and learning rates. This suggests that the practice in most countries of diversifying renewable energy may be a wrong strategy. However, perhaps certain motivations for diversifying are not or insufficiently covered by our model, which suggests a need for further research employing more complex models

Land-use Change and Solar Energy Production: A Real Option Approach

In this paper a real option model is developed to examine the critical factors affecting the decision to lease agricultural land to a company installing a PV power plant. The leasing payment is certain while the net revenues from agriculture are uncertain. We identify the profit values at which the farmer decides to lease his plot vs. continue farming it. By applying the model to the province of Bologna (Italy), we illustrate the possible land-use change scenarios in this area. We conclude by discussing the importance of PV energy production as a source of income for farmers and its implications from a social perspective

Land-use change and solar energy production: A real option approach

Purpose – In this paper, a real option model is developed to examine the critical factors affecting the decision to lease agricultural land to a company installing a PV power plant. Subsidies introduced by governments for the production of renewable energies have increased the investments in this sector. Since ground-based solar cells need land for energy production, then potential trade-off with agriculture in terms of land exists. The paper aims to discuss these issues. Design/methodology/approach – The paper uses the real option approach in order to take into account for uncertainty and irreversibility of the farmer’s decision. Findings – By applying the model to the province of Bologna (Italy), the paper illustrates the possible land-use change scenarios in this area. The paper concludes by discussing the importance of PV energy production as a source of income for farmers and its implications from a social perspective. Originality/value – The research is applied to the province of Bologna (Italy) where investments in ground-based solar cells are becoming quite common. The originality lies in the fact of considering the investment as irreversible, since it is a 20-year commitment from the farmers. The paper also takes into account the uncertainty in agricultural commodities’ prices

Real options analysis of investment in solar vs. wind energy: Diversification strategies under uncertain prices and costs

In this paper we study a community or firm considering to diversify its investment in two distinct renewable energy technologies, namely wind and solar PV electricity. We assume technological learning curves as a function of cumulative capital investment. A real options approach is applied as it takes into account uncertainty about prices and learning, as well as irreversibility associated with investment decisions. We investigate three different cases, dealing with uncertainty about future electricity prices, and uncertainty about the speed with which learning drives the costs of wind and solar electricity down. We assess the minimum threshold for the stochastic price and the maximum electricity production cost that makes it optimal for the firm to invest in the two technologies. The results show that the learning rate affects the option to invest in but reducing critical threshold for exercising it. The greater the amount of capital invested, the more learning stimulates earlier exercising of the option to invest. The firm will then anticipate the option to invest and exercise it for lower critical threshold values if all capital is invested in one technology. If capital investment is diversified, the option should be exercised at a higher critical threshold. More uncertainty in energy prices or technology costs postpones the option to invest. Although investing in both solar and wind may be profitable under particular conditions of price and cost uncertainty, the theoretically optimal strategy is generally investing in only one technology, that is, solar or wind, depending on their relative initial costs and learning rates. This suggests that the practice in most countries of diversifying renewable energy may reflect a mistaken strategy

Investing in energy forestry under uncertainty

Farmer's decisions to invest in renewable energy sources can contribute to lower greenhouse gas and mitigate climate change. However, it remains unclear how associated high sunk establishment costs, long-term commitment, highly uncertain net returns, and policy induced incentives could drive farmer's decision to afforest agricultural land. A real option model is used to theoretically frame the decision to switch from agriculture to energy forestry. Optimal investment timing is modeled and the functioning of government subsidies offered to speed up the switch to energy forestry is analyzed. The empirical analysis examines the establishment of new short-rotation coppice willow stands in Central East Sweden. It is shown that in the presence of volatile agricultural profits and high establishment costs, subsidies are needed to accelerate investment. We then examine the case of the municipality of Enköping and show that the combination of governmental subsidies for energy forestry with compensation for sewage sludge treatment provides an effective stimulus to investment in new willow stands which also has environmental benefits. © 2013 Elsevier B.V