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A real options study on cook stove CDM project under emission allowance price uncertainty

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  • Lee, Jaehyung
  • Jang, Heesun

Abstract

South Korea is one of the countries that have been actively involved in reducing greenhouse gas emissions and global climate action as a party to the Paris Agreement. As the national emissions reduction target has been getting reinforced, an increasing number of South Korean firms have been participating into the Clean Development Mechanism (CDM) projects to secure CER credits, one of which is the ‘improved energy-efficient cook-stove distribution project’ in developing countries. The purpose of this paper is to develop a real options model to analyze investment decisions on cook-stove distribution CDM project in Myanmar, where we estimate the optimal threshold CER price that makes the investment economically feasible. We also analyze the sensitivity of the threshold price across the investment parameters. The results show that our project was economically feasible at the time the project was launched, as the KOC prices were generally higher than the investment threshold price. The sharp decline of the KOC prices in 2020, however, deteriorated the economic feasibility of the project. The results suggest that various risk factors should be incorporated before making investment decisions.

Suggested Citation

  • Lee, Jaehyung & Jang, Heesun, 2022. "A real options study on cook stove CDM project under emission allowance price uncertainty," Journal of Asian Economics, Elsevier, vol. 80(C).
  • Handle: RePEc:eee:asieco:v:80:y:2022:i:c:s1049007822000240
    DOI: 10.1016/j.asieco.2022.101464
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    References listed on IDEAS

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    1. Zhao, Jinhua, 2003. "Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges," Journal of Public Economics, Elsevier, vol. 87(12), pages 2765-2789, December.
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    3. Park, Hojeong, 2012. "Real option analysis for effects of emission permit banking on investment under abatement cost uncertainty," Economic Modelling, Elsevier, vol. 29(4), pages 1314-1321.
    4. Sora Yoo & Yong-sung Cho & Hojeong Park, 2018. "An Optimal Management Strategy of Carbon Forestry with a Stochastic Price," Sustainability, MDPI, vol. 10(9), pages 1-13, September.
    5. N. Panwar & A. Kurchania & N. Rathore, 2009. "Mitigation of greenhouse gases by adoption of improved biomass cookstoves," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 14(6), pages 569-578, August.
    6. Peter Howie & Shreekant Gupta & Hojeong Park & Daulet Akmetov, 2020. "Evaluating policy success of emissions trading schemes in emerging economies: comparing the experiences of Korea and Kazakhstan," Climate Policy, Taylor & Francis Journals, vol. 20(5), pages 577-592, May.
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    More about this item

    Keywords

    KETS; Emission trading; Emission allowance price; CDM project; Cook stove; Real options;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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