Green renewal: incorporating environmental factors in equipment replacement decisions under technological change

Equipment replacement is a fact of life in every industrial setting, and this paper seeks to answer the question: How can firms and policy makers effectively balance environmental and economic concerns with respect to replacement decisions? A replacement model which includes both economic and environmental factors is presented. One must decide whether to keep the existing technology, upgrade to a newer technology which produces a smaller environmental burden, or wait for an even newer, cleaner technology which may be introduced soon. More than 25 000 test problems are solved, examining different objectives and covering a wide range of applications. Including environmental costs does not lead to a consistent increase in the adoption of cleaner technologies; however, including incentives to adopt newer technologies does. When one accounts for the environmental impact of producing new equipment and disposing of old equipment, earlier adoption of new technologies actually increases the total environmental burden in some cases.