Due to the irreversibility of many investments, firms often have a “rational reluctance” to invest immediately in risky projects and there is an option value to waiting. However, this delay in investment is sub-optimal if the technologies in question generate large positive externalities or reduce negative externalities.
As pandemics and extreme weather events have shown, there is significant social value to early, pre-emptive investments. In her paper, Sugandha explores how a policy that reduces the uncertainty of future revenues brings breakthrough clean technologies to market. She develops a dynamic model of firm entry and investment which shows that a social planner prefers risk-reduction policies over Pigouvian subsidies if investment costs increase in price risk. She exploits the presence of bunching around the UK's renewable energy feed-in-tariff eligibility threshold to estimate the value of risk reduction to firms. The magnitude of excess bunching around the eligibility threshold confirms that firms significantly value risk-reduction, with the policy yielding a positive and significant impact on entry and investment into the renewable energy market. Policies to reduce investor risk may therefore be an important component of helping breakthrough technologies scale-up in a timely manner, which in turn can help avoid acute societal crises.
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DPhil Candidate in Environmental Economics
Sugandha Srivastav is a DPhil candidate in Environmental Economics under Professor Cameron Hepburn. Her research interests include green innovation, growth & structural transformation, and climate policy.
Sugandha is also involved with the Oxford Martin Programme on Post-Carbon Transition as a research assistant. Previously, Sugandha worked as an economist at Vivid Economics where she focused on energy, natural resource management, and sustainable growth. Her clients included development finance institutions, national governments, and private sector companies. Prior to that Sugandha worked at the Indian Council for Research on International Economic Relations.
Sugandha holds an MSc in Economics from the London School of Economics and a BSc from the University of Warwick. At Oxford, Sugandha is affiliated with Oriel College, the Smith School of Enterprise and Environment, the Institute of New Economic Thinking, and is also a researcher for the Oxford Martin School Programme on the Post Carbon Transition.