Electricity capacity investment under risk aversion: A case study of coal, gas, and concentrated solar power
AbstractThe policy instrument many economists favor to reduce greenhouse gas emissions and to shift new investment towards low carbon technologies is the tradable allowance system. Experience with this instrument has been mixed, with a crucial design issue being the choice of whether to auction allowances to firms, or to grandfather them based on historical emissions. In this paper, we examine the changing incentives of investment in different technologies, when investors are risk averse and are expecting an allowance system with a certain allocation rule but do not know if the policy is going to take place in the near future. Investors also cannot fully predict future investment costs for the low-carbon technology. We apply a game theoretic model to examine the combined effects of uncertainty and risk aversion on the actions of potential investors into high and low carbon generating capacity, under both allocation rules and uncertain costs. We find that uncertainty and risk aversion do have implications towards investment incentives. We discuss policy implications of these findings.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Economics.
Volume (Year): 34 (2012)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/eneco
Emissions trading; Allowances; Allocation rules; Uncertainty; Risk aversion;
Find related papers by JEL classification:
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
- Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
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