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Inducing low-carbon investment in the electric power industry through a price floor for emissions trading

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  • Brauneis, Alexander
  • Mestel, Roland
  • Palan, Stefan

Abstract

Uncertainty about long-term climate policy is a major driving force in the evolution of the carbon market price. Since this price enters the investment decision process of regulated firms, this uncertainty increases the cost of capital for investors and might deter investments into new technologies at the company level. We apply a real options-based approach to assess the impact of climate change policy in the form of a constant or growing price floor on investment decisions of a single firm in a competitive environment. This firm has the opportunity to switch from a high-carbon “dirty” technology to a low-carbon “clean” technology. Using Monte Carlo simulation and dynamic programming techniques for real data, we determine the optimal CO2 price floor level and growth rate in order to induce investments into the low-carbon technology. We find that a carbon price floor can be used to induce earlier low-carbon technology investment and show this result to be robust to a large variety of input parameter settings.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 53 (2013)
Issue (Month): C ()
Pages: 190-204

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Handle: RePEc:eee:enepol:v:53:y:2013:i:c:p:190-204

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

Related research

Keywords: Carbon price; Price floor; Technological change;

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References

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Cited by:
  1. Angelo Antoci & Simone Borghesi & Mauro Sodini, 2012. "ETS and Technological Innovation: A Random Matching Model," Working Papers 2012.79, Fondazione Eni Enrico Mattei.
  2. Alexander Brauneis & Roland Mestel & Stefan Palan, 2012. "Does a cap on the carbon price have to be a cap on green investments?," Empirica, Springer, vol. 39(2), pages 217-231, May.

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