European CO2 prices and carbon capture investments
AbstractWe 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.
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 Energy Economics.
Volume (Year): 30 (2008)
Issue (Month): 6 (November)
Contact details of provider:
Web page: http://www.elsevier.com/locate/eneco
Emissions Trading Scheme Carbon capture and storage Real options;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
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.