Keywords: tanker industry, real options, environmental policy, Oil Pollution Act, USA, United States, double hull tankers, optimal timing, pollution emissions, extreme events, coastal tankers
On the optimal timing of the oil pollution act: Is there more value in waiting than acting?
Following the Exxon-Valdez incident the, Oil Pollution Act was enacted by the US government in 1990 mandating double hull construction tankers operating in US coastal tankers. Traditional Cost Benefit Analysis to investigate whether this requirement is cost efficient does not include the timing of the implementation in anticipation of technological improvements or other system changes. We investigate the option value of waiting by applying the standard model for optimal timing of environmental policy (Pindyck, 2002) and extend it to accommodate irregular and extreme emissions. We demonstrate that neglecting the occurrence of extreme events can be misleading.