Capacity investment strategies for environmentally responsible firms
- This thesis consists of three essays that analyze the capacity investment strategies for environmentally responsible firms, firms that introduce products into the market which have less impact on the environment or are less harmful to human health than their traditional equivalents, or firms that operate with conventional methods but switch to less carbon-intensive technologies in their new capacity investments due to the climate regulations. In the first essay (co-authored with Erica L. Plambeck), we examine capacity leadership, in which a manufacturer adjusts the timing and level of her own capacity investment in order to motivate noncontractible capacity investment by a supplier. When the firms have common information about the demand distribution and their capacities are complements, the manufacturer can increase the supplier's incentive for capacity investment by building her own capacity early. When the supplier's bargaining strength is moderately high, early capacity investment by the manufacturer strictly increases both firms' expected profits. The manufacturer's optimal level of early capacity increases as the selling price and demand for the end product increase, capacity costs decrease, or she obtains private information that demand is likely to be high. If the supplier's capacity investment is contractible, the manufacturer may still achieve greater expected profit through early capacity investment than a contract. When the firms' capacities are substitutes, early capacity investment by the manufacturer reduces her eventual payment to the supplier and thus the supplier's incentive for capacity investment. Nevertheless, the supplier's capacity cost is sufficiently lower than that of the manufacturer, the manufacturer optimally builds early capacity to signal a high demand forecast. These results may help to explain why several manufacturers of renewable energy and energy-efficient products have built capacity early, before it could be utilized. In the second essay (co-authored with Stefan Reichelstein), we investigate the carbon capture and storage (CCS) technologies for fossil fuel power plants, which offer the potential for significant reductions in carbon dioxide emissions. We examine the break-even value for CCS adoptions, that is, the critical value in the charge for carbon dioxide emissions that would justify investment in CCS capabilities. Our analysis takes explicitly into account that the supply of electricity at the wholesale level (generation) is organized competitively in some U.S. jurisdictions, while in others a regulated utility provides integrated generation and distribution services. For either market structure, we find that emissions charges near $30 per tonne of carbon dioxide would be the break-even value for adopting CCS capabilities at new coal-fired power plants. The corresponding break-even values for natural gas plants are substantially higher, near $60 per tonne. Our break-even estimates serve as a basis for projecting the change in electricity prices once carbon emissions become costly. CCS capabilities effectively put an upper bound on the increase in electricity prices resulting from carbon regulations and we estimate this bound to be near 30% at the retail level for both coal and natural gas plants. In contrast to the competitive power supply scenario, however, these price increases materialize only gradually for a regulated utility. The delay in price adjustments reflects that for regulated firms the basis for setting product prices is historical cost, rather than current cost. In the third essay (co-authored with Erica Plambeck and Terry Taylor), we analyze how the variability in a manufacturer's cost of emissions affects its expected profit, optimal location, production and export quantities, and accounting for entry and competition among manufacturers, how the variability in the cost of emissions affects total expected emissions, leakage (the shift in emissions from the region with climate policy to a region with no policy), trade, consumer surplus, and government revenue. We incorporate a stochastic cost for emissions into Venables' widely-used model of international trade for a single product. We analyze two countries where country 1 has a climate change regulation while country 2 does not. Initially, all firms know the distribution of the emissions cost, which will effectively increase the unit cost of production in country 1. A firm may establish a production facility in country 1 or 2, and incurs a fixed cost to do so. Then, all firms realize the emissions cost and choose quantities to produce and export in a Cournot equilibrium. Our preliminary results suggest that despite the policy makers' common wisdom, the equilibrium number of firms and the expected consumer surplus in the country with climate policy, and the total number of firms increase in the variability of emissions cost. If the country with climate policy introduces an import tax, the results change depending on the carbon intensity of a unit product manufactured in country 2.
|Type of resource
|electronic; electronic resource; remote
|1 online resource.
|Stanford University, Graduate School of Business.
|Plambeck, Erica L
|Plambeck, Erica L
|Lee, Hau Leung
|Lee, Hau Leung
|Statement of responsibility
|Submitted to the Graduate School of Business.
|Thesis (Ph.D.)--Stanford University, 2011.
- © 2011 by Ozge Islegen
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