Irreversible environmental investments with uncertain benefit levels

Abstract The principal property of irreversibilities is that they generate incentives for policies that are smaller in scale than a myopic policy. The circumstances in which this irreversibility effect occurs are first considered for a model with unit benefit uncertainty and time-invariant cost functions. With changes in cost relationships over time, such as fixed costs for augmenting investment, it may be desirable to adopt policies with scales that are larger than, smaller than, or the same as the scale of a myopic policy. With rising unit benefits over time one adopts a policy scale larger than or the same as that in the myopic case, and with declining unit benefits the opposite result holds. Irreversibilities will, however, lead to underinvestments in comparison with incompletely reversible investments with similar adjustment costs for increasing policy investments.