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Risk aversion and CO2 regulatory uncertainty in power generation investment: Policy and modeling implications


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  • Fan, Lin
  • Hobbs, Benjamin F.
  • Norman, Catherine S.


We consider a simulation of risk-averse producers when making investment decisions in a competitive energy market, who face uncertainty about future regulation of carbon dioxide emissions. Investments are made under regulatory uncertainty; then the regulatory state is revealed and producers realize returns. We consider anticipated taxes, grandfathered permits and auctioned permits and show that some anticipated policies increase investment in the relatively dirty technology. Beliefs about the policy instrument that will be used to price carbon may be as important as certainty that carbon will be priced. More generally, a failure to consider risk aversion may bias policy analysis for the power sector.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 60 (2010)
Issue (Month): 3 (November)
Pages: 193-208

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Handle: RePEc:eee:jeeman:v:60:y:2010:i:3:p:193-208

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Keywords: Electric power Risk aversion Emissions markets Climate policy;


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Cited by:
  1. Guy Meunier, 2014. "Risk Aversion and Technology Portfolios," Review of Industrial Organization, Springer, Springer, vol. 44(4), pages 347-365, June.
  2. van der Weijde, Adriaan Hendrik & Hobbs, Benjamin F., 2012. "The economics of planning electricity transmission to accommodate renewables: Using two-stage optimisation to evaluate flexibility and the cost of disregarding uncertainty," Energy Economics, Elsevier, Elsevier, vol. 34(6), pages 2089-2101.
  3. Pierre-André Jouvet & Frédéric Lantz & Elodie Le Cadre, 2011. "The bioenergies development: the role of biofuels and the CO2 price," Working Papers, INRA, Economie Publique 2011/02, INRA, Economie Publique.
  4. Guy MEUNIER, 2013. "Risk aversion and technology mix in an electricity market," Working Papers, Institut National de la Recherche Agronomique, France 221660, Institut National de la Recherche Agronomique, France.
  5. Sunderkötter, Malte & Weber, Christoph, 2012. "Valuing fuel diversification in power generation capacity planning," Energy Economics, Elsevier, Elsevier, vol. 34(5), pages 1664-1674.
  6. 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.
  7. Fan, Lin & Norman, Catherine S. & Patt, Anthony G., 2012. "Electricity capacity investment under risk aversion: A case study of coal, gas, and concentrated solar power," Energy Economics, Elsevier, Elsevier, vol. 34(1), pages 54-61.
  8. Donatella Baiardi & Matteo Manera & Mario Menegatti, 2014. "The Effects of Environmental Risk on Consumption: an Empirical Analysis on the Mediterranean Countries," Working Papers, Fondazione Eni Enrico Mattei 2014.43, Fondazione Eni Enrico Mattei.


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