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Rate of return requirement for climate versus petroleum projects

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Author Info

  • Emhjellen, Magne

    (Petoro)

  • Osmundsen, Petter

    ()
    (UiS)

Abstract

Many sosio-economic rates of returns for climate projects have been used in analysing the present value of the climate benefit. However, little attention has been devoted to profitability assessments based on commercial considerations. Economic valuation of climate projects, seen from the perspective of a commercial company, is the subject of this article. In particular, we examine the required rate of return for a project where the uncertainty in the CO2 quota price is the main market uncertainty. We complement the existing climate literature by examining the required rate of return of a climate project in a Capital Asset Pricing Model (CAPM) setting. We find that the CO2 quota price has slightly more systematic risk in the period calculated than the oil price, and estimate the nominal required rate of return for the value of CO2 reduction to be 7.3 percentage points.

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Bibliographic Info

Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2012/7.

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Length: 18 pages
Date of creation: 11 Apr 2012
Date of revision:
Handle: RePEc:hhs:stavef:2012_007

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Postal: University of Stavanger, NO-4036 Stavanger, Norway
Web page: http://www.uis.no/research/economics_and_finance
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Keywords: Climate Projects; Decision Analysis;

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References

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  1. Gollier, Christian & Weitzman, Martin L., 2010. "How should the distant future be discounted when discount rates are uncertain?," Economics Letters, Elsevier, Elsevier, vol. 107(3), pages 350-353, June.
  2. Osmundsen, Petter & Emhjellen, Magne, 2010. "CCS from the gas-fired power station at Kårstø? A commercial analysis," Energy Policy, Elsevier, Elsevier, vol. 38(12), pages 7818-7826, December.
  3. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 45(3), pages 686-702, September.
  4. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 260-271, March.
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Cited by:
  1. Emhjellen, Magne & Osmundsen, Petter, 2014. "CCS - Failing to pass decision gates," UiS Working Papers in Economics and Finance, University of Stavanger 2014/8, University of Stavanger.

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