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The interplay between technology options, market uncertainty, and policy in zero-carbon investment decisions

Author

Listed:
  • De Weerdt, Loïc
  • Oliveira, Carlos
  • Larson, Eric D.
  • Greig, Chris

Abstract

Using a real-option approach, we study the decision of a private power generator considering investment in a zero-CO2-emissions plant. Specifically, we analyze the investment decision in mutually exclusive technologies under the presence of market uncertainty, for different scenarios and under different policy regimes within each scenario. The scenarios are based on emissions targets, such as net-zero-CO2 emissions by 2050. The policy regimes are based on whether or not the targets are binding. We find that if there are fewer available zero-CO2-technology options there is less hesitation to invest, which potentially leads to earlier investment. We also find that some policies are more effective than others in encouraging investment: incentive payments are somewhat effective, penalties for not reaching zero emissions by a specified future date are more effective; a steadily increasing CO2-emission-allowance price also speeds up investment.

Suggested Citation

  • De Weerdt, Loïc & Oliveira, Carlos & Larson, Eric D. & Greig, Chris, 2023. "The interplay between technology options, market uncertainty, and policy in zero-carbon investment decisions," Energy Economics, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:eneeco:v:128:y:2023:i:c:s0140988323006643
    DOI: 10.1016/j.eneco.2023.107166
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    More about this item

    Keywords

    Energy transition; CO2-emissions targets; Investment under uncertainty; Dynamic public economics;
    All these keywords.

    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • P18 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Energy; Environment
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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