Staged investments in carbon abatement technologies under a phased emission trading scheme: A real options analysis

This study examines how phased changes in the Korean Emissions Trading Scheme (K-ETS) influence firms’ adoption of carbon capture and storage (CCS) through a compound real option framework. Allowance prices are modeled as a phase-dependent geometric Brownian motion, reflecting the progressive phase-out of free allocation. A staged CCS investment structure, pilot deployment followed by full-scale expansion, is considered, and the investment values are computed using a Least-Squares Monte Carlo (LSMC) algorithm. Numerical analysis based on calibrated parameters for the cement, coal-fired power, and steel sectors in Korea shows that pilot investments tend to occur in the earlier stages of the planning horizon, while full-scale deployment typically follows within approximately two to three years. Sensitivity analysis highlights allowance price drift as the primary driver of investment value, followed by price volatility as a secondary driver. Also, technological progress in CCS, which lowers capital and operating costs, further increases investment value and strengthens investment incentives. Moreover, increasing the capture share at the pilot stage leads to heterogeneous investment values across sectors, reflecting differences in emissions intensity and free allocation structures. In summary, the results demonstrate how phased ETS transitions shape staged CCS investment strategies and provide policy-relevant insights into how allocation rules and price expectations can support economically viable large-scale CCS deployment.