Investment under market and climate policy uncertainty
AbstractClimate change is considered as one of the major systematic risks for global society in the 21st century. Yet, serious efforts to slow the accumulation of emissions are still in their primordial stage and policy makers fail to give proper long-term signals to emitters. These days, investors do not only face uncertainty from volatile prices in the traditional markets, but also from the less conceivable uncertainty of stricter climate change policy. This paper investigates the impact of learning about the commitment of government to a climate policy regime in a real options framework. Two types of uncertainty are distinguished: market-driven price volatility around a mean price and bifurcating price trajectories mimicking uncertainty about changing policy regimes. One of the findings is that the producer facing market uncertainty about CO2 prices invests into carbon-saving technology earlier than if the actual price path had been known on beforehand. This is not a typical real options outcome, but the result of optimizing under imperfect information, which leads to decisions that are different from the optimal strategies under full information. On the other hand, policy uncertainty induces the producer to wait and see whether the government will further commit to climate policy. This waiting is a real options effect. In other words, if learning about government commitment is more valuable than investing into mitigation technologies immediately, the option value exceeds the value of the technology and investment will be postponed. This might lead to supply shortages and limited diffusion of less carbon-intensive technology.
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 Elsevier in its journal Applied Energy.
Volume (Year): 85 (2008)
Issue (Month): 8 (August)
Contact details of provider:
Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/description#description
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Baccini, Leonardo & Urpelainen, Johannes, 2012. "Legislative fractionalization and partisan shifts to the left increase the volatility of public energy R&D expenditures," Energy Policy, Elsevier, vol. 46(C), pages 49-57.
- Schenker, Oliver, 2011. "How uncertainty reduces greenhouse gas emissions," MPRA Paper 29591, University Library of Munich, Germany.
- Elverhøi, Morten & Fleten, Stein-Erik & Fuss, Sabine & Heggedal, Ane Marte & Szolgayova, Jana & Troland, Ole Christian, 2010. "Evaluation of hydropower upgrade projects - a real options approach," MPRA Paper 23005, University Library of Munich, Germany.
- Hervé-Mignucci, Morgan, 2011. "Rôle du signal prix du carbone sur les décisions d'investissement des entreprises," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8200 edited by Keppler, Jan Horst.
- Alexander Brauneis & Roland Mestel & Stefan Palan & Michael Loretz, 2011.
"Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading,"
Working Paper Series, Social and Economic Sciences
2011-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
- Brauneis, Alexander & Mestel, Roland & Palan, Stefan, 2013. "Inducing low-carbon investment in the electric power industry through a price floor for emissions trading," Energy Policy, Elsevier, vol. 53(C), pages 190-204.
- Alexander Brauneis & Michael Loretz & Roland Mestel & Stefan Palan, 2011. "Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading," Working Papers 2011.74, Fondazione Eni Enrico Mattei.
- Zhang, Xian & Wang, Xingwei & Chen, Jiajun & Xie, Xi & Wang, Ke & Wei, Yiming, 2014. "A novel modeling based real option approach for CCS investment evaluation under multiple uncertainties," Applied Energy, Elsevier, vol. 113(C), pages 1059-1067.
- Svensson, Elin & Berntsson, Thore & Strömberg, Ann-Brith & Patriksson, Michael, 2009. "An optimization methodology for identifying robust process integration investments under uncertainty," Energy Policy, Elsevier, vol. 37(2), pages 680-685, February.
- Eryilmaz, Derya & Homans, Frances, 2013. "Uncertainty in Renewable Energy Policy: How do Renewable Energy Credit markets and Production Tax Credits affect decisions to invest in renewable energy?," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150018, Agricultural and Applied Economics Association.
- Zhang, Dongjie & Liu, Pei & Ma, Linwei & LI, Zheng, 2013. "A multi-period optimization model for planning of China's power sector with consideration of carbon dioxide mitigation—The importance of continuous and stable carbon mitigation policy," Energy Policy, Elsevier, vol. 58(C), pages 319-328.
- 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.
- Lambie, N. Ross, 2009. "The role of real options analysis in the design of a greenhouse gas emissions trading scheme," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47626, Australian Agricultural and Resource Economics Society.
- Lambie, Neil Ross, 2010.
"Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme,"
Australian Journal of Agricultural and Resource Economics,
Australian Agricultural and Resource Economics Society, vol. 54(2), June.
- Neil Ross Lambie, 2010. "Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(2), pages 203-217, 04.
- Cao, M.F. & Huang, G.H. & Lin, Q.G., 2010. "Integer programming with random-boundary intervals for planning municipal power systems," Applied Energy, Elsevier, vol. 87(8), pages 2506-2516, August.
- 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.
- Tolis, Athanasios & Doukelis, Aggelos & Tatsiopoulos, Ilias, 2010. "Stochastic interest rates in the analysis of energy investments: Implications on economic performance and sustainability," Applied Energy, Elsevier, vol. 87(8), pages 2479-2490, August.
- Tolis, Athanasios I. & Rentizelas, Athanasios A., 2011. "An impact assessment of electricity and emission allowances pricing in optimised expansion planning of power sector portfolios," Applied Energy, Elsevier, vol. 88(11), pages 3791-3806.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
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.