(UK Performance and Innovation Unit, 2002). Both decommission costs and carbon credits are
naturally sensitive to the use of DDRs and in Table 6 we compare the NPV of investment in
a nuclear power station using our estimated DDRs.10 The appraisal shows that although the
SS model has significant consequences for the present value of revenues and carbon credits,
the present value of decommissioning and operating costs is also increased considerably. In
this respect, the NPV of nuclear build is affected only marginally when evaluated using DDRs,
although the SS and the RS models increase the NPV of the project by more than 8%.
5 Conclusions
This paper builds on N&P’s econometric approach to determining DDRs and emphasises the
policy relevance of model selection when dealing with lengthy time horizons. Using UK interest
rate data we show that the econometric specification should allow the data generating process
to change over time and that the broad class of state space models is appropriate. The policy
relevance of our procedure is highlighted in the valuation of carbon sequestration the present
value of which is increased by over 200%.
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10We follow the same cost and price assumptions and time horizons for construction, operation and decommis-
sioning as Pearce et al. (2003).