Carbon Capture Retrofits and the Cost of Regulatory Uncertainty
AbstractPower generation firms confront impending replacement of an aging coal-fired fleet in a business environment characterized by volatile natural gas prices and uncertain carbon regulation. We develop a stochastic dynamic programming model of firm investment decisions that minimizes the expected present value of future power generation costs under uncertain natural gas and carbon prices. We explore the implications of regulatory uncertainty on generation technology choice and the optimal timing of investment, and assess the implications of these choices for regulators. We find that interaction of regulatory uncertainty with irreversible investment always raises the social cost of carbon abatement. Further, the social cost of regulatory uncertainty is strongly dependent on the relative competitiveness of IGCC plants, for which the cost of later carbon capture retrofits is comparatively small, and on the firmÕs ability to use investments in natural gas generation as a transitional strategy to manage carbon regulation uncertainty. Without highly competitive IGCC or low gas prices, regulatory uncertainty can increase the expected social cost of reducing emissions by 40 to 60%.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by International Association for Energy Economics in its journal The Energy Journal.
Volume (Year): Volume 28 (2007)
Issue (Month): Number 4 ()
Find related papers by JEL classification:
- F0 - International Economics - - General
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Fuss, Sabine & Johansson, Daniel J.A. & Szolgayova, Jana & Obersteiner, Michael, 2009. "Impact of climate policy uncertainty on the adoption of electricity generating technologies," Energy Policy, Elsevier, vol. 37(2), pages 733-743, February.
- Shahnazari, Mahdi & McHugh, Adam & Maybee, Bryan & Whale, Jonathan, 2014. "Evaluation of power investment decisions under uncertain carbon policy: A case study for converting coal fired steam turbine to combined cycle gas turbine plants in Australia," Applied Energy, Elsevier, vol. 118(C), pages 271-279.
- Pahle, Michael & Fan, Lin & Schill, Wolf-Peter, 2011. "How emission certificate allocations distort fossil investments: The German example," Energy Policy, Elsevier, vol. 39(4), pages 1975-1987, April.
- Szolgayová, Jana & Golub, Alexander & Fuss, Sabine, 2014. "Innovation and risk-averse firms: Options on carbon allowances as a hedging tool," Energy Policy, Elsevier, vol. 70(C), pages 227-235.
- Rennings, Klaus & Markewitz, Peter & Vögele, Stefan, 2009.
"How clean is clean? Incremental versus radical technological change in coal-fired power plants,"
ZEW Discussion Papers
09-021, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Klaus Rennings & Peter Markewitz & Stefan Vögele, 2013. "How clean is clean? Incremental versus radical technological change in coal-fired power plants," Journal of Evolutionary Economics, Springer, vol. 23(2), pages 331-355, April.
- Wilson, Nathan E., 2012. "Uncertain regulatory timing and market dynamics," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 102-115.
- Ruester, Sophia & Neumann, Anne, 2008. "The prospects for liquefied natural gas development in the US," Energy Policy, Elsevier, vol. 36(8), pages 3150-3158, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David Williams).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.