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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Working Papers with number halshs-00829667.
Date of creation: 29 Nov 2011
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00829667
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
Carbon Capture and Storage (CCS); climate policy; regulatory uncertaint;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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, Society for Financial Studies, vol. 14(1), pages 113-47.
- 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, Elsevier, vol. 30(4), pages 1933-1950, July.
- Blyth, William & Bunn, Derek & Kettunen, Janne & Wilson, Tom, 2009. "Policy interactions, risk and price formation in carbon markets," Energy Policy, Elsevier, Elsevier, vol. 37(12), pages 5192-5207, December.
- Aldy, Joseph E. & Krupnick, Alan J. & Newell, Richard G. & Parry, Ian W.H. & Pizer, William A., 2009.
"Designing Climate Mitigation Policy,"
Discussion Papers, Resources For the Future
dp-08-16, Resources For the Future.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.