Quasi-option value and climate policy choices

In the climate change issue, the environmental irreversibility (risk of an acceleration of mitigation policies if the worst happens) has to be balanced with the investment irreversibility (risk of over-cautious policies). To explore this balance, we define an option value for a precautionary climate policy. Using the simplest decision-making model, we expose how option value relates to the expected value of future information. Using quantitative data from an integrated assessment model, we find that most of the time the environmental irreversibility dominates the investment irreversibility. For all cases explored here, the order of magnitude of the option value was significant, about 50% of the opportunity cost. (Copyright (c) Elsevier Science B.V., Amsterdam. All rights reserved.)