Abstract:

This paper develops a stochastic model that explains and solves the energy paradox, when the agent postpones the energy-saving investments in order to maximize its option value. The latter is mutually fueled by three main factors. (i) Uncertainty of future benefits of energy savings, which we assume that they follow geometric Brownian motion. In this process, we internalize the effects of (ii) irreversibility and self-sustained lower costs through (iii) learning by doing. To affirm the capacity and versatility of the model, we generate simulation results for two equipments for electrical uses. Requirements of profitability rates by agents reach 17.66% for adopting economic lamps and 19.88% for adopting of solar water heaters, which explains the energy paradox. Beyond that, we extend the model to simulate the effects of energy policy instruments to promote adoption of such equipments. Simulations prove that the taxation of energy prices is likely to be more effective that the subsidy for energy-saving equipments. It is also found that the combination of these two instruments amplifies the adoption of energy-saving equipments and generates very favorable economic and environmental externalities. Consequently, we urge policy makers to allocate the energy taxation revenues to fund subsidizing of the energy-saving equipments.