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Assessing the effects of CO2 price caps on electricity investments--A real options analysis

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  • Szolgayova, Jana
  • Fuss, Sabine
  • Obersteiner, Michael
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    Abstract

    This paper uses real options modeling to assess the impact of different climate change policy instruments on investment, profits and cumulative emissions in the electricity sector. Even though CO2 price caps or "safety valves" have been suggested as methods to limit uncertainty emanating from fluctuating prices of CO2 permits that would hurt the industry's profit and thereby also energy security, our analysis shows that price caps set at a too low level are detrimental to the adoption of e.g. modern biomass-fired capacity as a replacement for existing coal-fired power plants. We therefore conduct a series of experiments with different policy scenarios to analyze under which regime emissions are most effectively reduced. With respect to CO2 price uncertainty, it turns out that even for moderately rising CO2 prices, fluctuations frequently lead to investment into carbon capture and storage (CCS), while investment is often not triggered in the face of deterministic CO2 prices.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 36 (2008)
    Issue (Month): 10 (October)
    Pages: 3974-3981

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    Handle: RePEc:eee:enepol:v:36:y:2008:i:10:p:3974-3981

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

    Related research

    Keywords: Electricity planning Climate change policy Price caps;

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    Cited by:
    1. Cheng, Ching-Tsung & Lo, Shang-Lien & Lin, Tyrone T., 2011. "Applying real options analysis to assess cleaner energy development strategies," Energy Policy, Elsevier, Elsevier, vol. 39(10), pages 5929-5938, October.
    2. Alexander Brauneis & Michael Loretz & Roland Mestel & Stefan Palan, 2011. "Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading," Working Papers 2011.74, Fondazione Eni Enrico Mattei.
    3. Pahle, Michael & Fan, Lin & Schill, Wolf-Peter, 2011. "How emission certificate allocations distort fossil investments: The German example," Energy Policy, Elsevier, Elsevier, vol. 39(4), pages 1975-1987, April.
    4. Audrey Laude & Christian Jonen, 2011. "Biomass and CCS: The influence of the learning effect," Working Papers halshs-00829779, HAL.
    5. Shahnazari, Mahdi & McHugh, Adam & Maybee, Bryan & Whale, Jonathan, 2014. "Evaluation of power investment decisions under uncertain carbon policy: A case study for converting coal fired steam turbine to combined cycle gas turbine plants in Australia," Applied Energy, Elsevier, vol. 118(C), pages 271-279.
    6. Alexander Brauneis & Roland Mestel & Stefan Palan, 2012. "Does a cap on the carbon price have to be a cap on green investments?," Empirica, Springer, Springer, vol. 39(2), pages 217-231, May.
    7. Laude, Audrey & Jonen, Christian, 2013. "Biomass and CCS: The influence of technical change," Energy Policy, Elsevier, Elsevier, vol. 60(C), pages 916-924.
    8. 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.
    9. Szolgayová, Jana & Golub, Alexander & Fuss, Sabine, 2014. "Innovation and risk-averse firms: Options on carbon allowances as a hedging tool," Energy Policy, Elsevier, Elsevier, vol. 70(C), pages 227-235.
    10. Lambie, Neil Ross, 2010. "Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, Australian Agricultural and Resource Economics Society, vol. 54(2), June.
    11. Phillia Restiani & Regina Betz, 2010. "The Effects of Penalty Design on Market Performance: Experimental Evidence from an Emissions Trading Scheme with Auctioned Permits," Environmental Economics Research Hub Research Reports, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University 1087, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
    12. 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.

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