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European CO2 prices and carbon capture investments

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Author Info

  • Abadie, Luis M.
  • Chamorro, José M.

Abstract

We assess the option to install a carbon capture and storage (CCS) unit in a coal-fired power plant operating in a carbon-constrained environment. We consider two sources of risk, namely the price of emission allowance and the price of the electricity output. First we analyse the performance of the EU market for CO2 emission allowances. Specifically, we focus on the contracts maturing in the Kyoto Protocol's first commitment period (2008 to 2012) and calibrate the underlying parameters of the allowance price process. Then we refer to the Spanish wholesale electricity market and calibrate the parameters of the electricity price process. We use a two-dimensional binomial lattice to derive the optimal investment rule. In particular, we obtain the trigger allowance prices above which it is optimal to install the capture unit immediately. We further analyse the effect of changes in several variables on these critical prices, among them allowance price volatility and a hypothetical government subsidy. We conclude that, at current permit prices, immediate installation does not seem justified from a financial point of view. This need not be the case, though, if carbon market parameters change dramatically, carbon capture technology undergoes significant improvements, and/or a specific governmental policy to promote these units is adopted.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 30 (2008)
Issue (Month): 6 (November)
Pages: 2992-3015

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Handle: RePEc:eee:eneeco:v:30:y:2008:i:6:p:2992-3015

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Emissions Trading Scheme Carbon capture and storage Real options;

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Citations

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Cited by:
  1. Assoumou, Edi & Maïzi, Nadia, 2011. "Carbon value dynamics for France: A key driver to support mitigation pledges at country scale," Energy Policy, Elsevier, vol. 39(7), pages 4325-4336, July.
  2. GAHUNGU, Joachim & SMEERS, Yves, 2011. "A real options model for electricity capacity expansion," CORE Discussion Papers 2011044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Krahé, Max & Heidug, Wolf & Ward, John & Smale, Robin, 2013. "From demonstration to deployment: An economic analysis of support policies for carbon capture and storage," Energy Policy, Elsevier, vol. 60(C), pages 753-763.
  4. Stephan Spiecker & Volker Eickholt, 2013. "The Impact Of Carbon Capture And Storage On A Decarbonized German Power Market," EWL Working Papers 1304, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Oct 2013.
  5. Wang, Qiang & Chen, Xi, 2013. "Rethinking and reshaping the climate policy: Literature review and proposed guidelines," Renewable and Sustainable Energy Reviews, Elsevier, vol. 21(C), pages 469-477.
  6. Audrey Laude & Christian Jonen, 2011. "Biomass and CCS: The influence of the learning effect," Working Papers halshs-00829779, HAL.
  7. Veith, Stefan & Werner, Jörg R. & Zimmermann, Jochen, 2009. "Capital market response to emission rights returns: Evidence from the European power sector," Energy Economics, Elsevier, vol. 31(4), pages 605-613, July.
  8. Abadie, Luis M. & Chamorro, José M., 2009. "Income risk of EU coal-fired power plants after Kyoto," Energy Policy, Elsevier, vol. 37(12), pages 5304-5316, December.
  9. Joachim Gahungu and Yves Smeers, 2012. "A Real Options Model for Electricity Capacity Expansion," RSCAS Working Papers 2012/08, European University Institute.
  10. Nagy, Tamás, 2013. "A villamos erőművek szén-dioxid-kibocsátásának modellezése reálopciók segítségével
    [Modelling of the carbon dioxide emissions of a power plant, using real options]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 318-341.
  11. Walsh, D.M. & O'Sullivan, K. & Lee, W.T. & Devine, M.T., 2014. "When to invest in carbon capture and storage technology: A mathematical model," Energy Economics, Elsevier, vol. 42(C), pages 219-225.
  12. Fan, Ying & Mo, Jian-Lei & Zhu, Lei, 2013. "Evaluating coal bed methane investment in China based on a real options model," Resources Policy, Elsevier, vol. 38(1), pages 50-59.
  13. 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.
  14. Abadie, Luis M. & Chamorro, José M., 2009. "Monte Carlo valuation of natural gas investments," Review of Financial Economics, Elsevier, vol. 18(1), pages 10-22, January.
  15. Lukas, Elmar & Welling, Andreas, 2014. "Timing and eco(nomic) efficiency of climate-friendly investments in supply chains," European Journal of Operational Research, Elsevier, vol. 233(2), pages 448-457.
  16. Luis M. Abadie & Ibon Galarraga & Dirk Rübbelke, 2013. "Evaluation of Two Alternative Carbon Capture and Storage Technologies: A Stochastic Model," Working Papers 2013-07, BC3.
  17. Cheng, Ching-Tsung & Lo, Shang-Lien & Lin, Tyrone T., 2011. "Applying real options analysis to assess cleaner energy development strategies," Energy Policy, Elsevier, vol. 39(10), pages 5929-5938, October.
  18. Huang, Wei Ming & Lee, Grace W.M., 2009. "GHG legislation: Lessons from Taiwan," Energy Policy, Elsevier, vol. 37(7), pages 2696-2707, July.
  19. Walsh, Darragh & O'Sullivan, K. & Lee, W. T. & Devine, M., 2013. "When to Invest in Carbon Capture and Storage Technology in the Presence of Uncertainty: a Mathematical Model," Papers WP461, Economic and Social Research Institute (ESRI).
  20. Luis M. Abadie & José M. Chamorro, 2009. "The Economics of Gasification: A Market-Based Approach," Energies, MDPI, Open Access Journal, vol. 2(3), pages 662-694, August.
  21. 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.
  22. Zhang, Yue-Jun & Wei, Yi-Ming, 2010. "An overview of current research on EU ETS: Evidence from its operating mechanism and economic effect," Applied Energy, Elsevier, vol. 87(6), pages 1804-1814, June.
  23. Laude, Audrey & Jonen, Christian, 2013. "Biomass and CCS: The influence of technical change," Energy Policy, Elsevier, vol. 60(C), pages 916-924.

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