IDEAS home Printed from https://ideas.repec.org/a/eee/ecanpo/v80y2023icp1096-1110.html
   My bibliography  Save this article

Using a price floor on carbon allowances to achieve emission reductions under uncertainty

Author

Listed:
  • Zhang, Xinhua
  • Hueng, C. James
  • Lemke, Robert J.

Abstract

We build a real options investment model for carbon-allowance trading markets with a price-floor mechanism. A power plant faces a choice between undertaking an irreversible investment in carbon emission reduction or holding the option to invest later. The government encourages firms to invest immediately by guaranteeing a minimum value of the allowances. We use the Least Squares Monte Carlo method to find the value of the option and derive the firm’s threshold condition of whether to invest or to wait. The model allows us to compare the government’s costs of alternative policies for encouraging the investment. Using the newly established Chinese carbon emission trading scheme as an example to calibrate the model, simulations show that the expected cost to the government of the price-floor policy is lower compared with using a lump-sum subsidy or a preferential tax-rate policy designed to achieve the same level of reduction in emissions.

Suggested Citation

  • Zhang, Xinhua & Hueng, C. James & Lemke, Robert J., 2023. "Using a price floor on carbon allowances to achieve emission reductions under uncertainty," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1096-1110.
    • Handle: RePEc:eee:ecanpo:v:80:y:2023:i:c:p:1096-1110
    DOI: 10.1016/j.eap.2023.10.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0313592623002497
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eap.2023.10.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Real options model; Price floor; Carbon emission reduction; Government subsidies;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecanpo:v:80:y:2023:i:c:p:1096-1110. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/economic-analysis-and-policy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.