Uncertainty about long term climate targets: A real option approach to investment appraisal
AbstractThis 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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Date of creation: 29 Nov 2011
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Carbon Capture and Storage (CCS); climate policy; regulatory uncertaint;
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