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Uncertainty about long term climate targets: A real option approach to investment appraisal

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  • Audrey Laude

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    (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

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    Abstract

    This article analyses how investors cope with carbon price uncertainty on the long run. More precisely, we assume that climate targets are not well established, so decision makers do not know if climate policy will be highly or moderately restrictive. It means that the long run carbon price drift is uncertain. However, there is a progressive resolution of this uncertainty. A real option analysis is conducted, in the case of a Carbon Capture and Storage (CCS) project appraisal. We show that this additional uncertainty decreases investment probability, but does not lead to a lag of investment, as generally assumed in real option literature.

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    File URL: http://halshs.archives-ouvertes.fr/docs/00/82/96/67/PDF/dr201113.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number halshs-00829667.

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    Date of creation: 29 Nov 2011
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    Handle: RePEc:hal:wpaper:halshs-00829667

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00829667
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    Related research

    Keywords: Carbon Capture and Storage (CCS); climate policy; regulatory uncertaint;

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    1. Blyth, William & Bunn, Derek & Kettunen, Janne & Wilson, Tom, 2009. "Policy interactions, risk and price formation in carbon markets," Energy Policy, Elsevier, vol. 37(12), pages 5192-5207, December.
    2. Joseph E. Aldy & Alan J. Krupnick & Richard G. Newell & Ian W.H. Parry & William A. Pizer, 2009. "Designing Climate Mitigation Policy," NBER Working Papers 15022, National Bureau of Economic Research, Inc.
    3. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-47.
    4. Yang, Ming & Blyth, William & Bradley, Richard & Bunn, Derek & Clarke, Charlie & Wilson, Tom, 2008. "Evaluating the power investment options with uncertainty in climate policy," Energy Economics, Elsevier, vol. 30(4), pages 1933-1950, July.
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