Impact of climate policy uncertainty on the adoption of electricity generating technologies
This paper presents a real options model where multiple options are evaluated simultaneously so that the effect of the individual options on each other is accounted for. We apply this model to the electricity sector, where we analyze three typical technologies based on fossil fuel, fossil fuel with carbon capture and renewable energy, respectively. In this way, we can analyze the transition from CO2-intensive to CO2-neutral electricity production in the face of rising and uncertain CO2 prices. In addition, such a modelling approach enables us to estimate precisely the expected value of (perfect) information, i.e. the willingness of investors and producers to pay for information about the correct CO2 price path. As can be expected, the expected value of information rises with increasing CO2 price uncertainty. In addition, the larger the price uncertainty, the larger are the cumulative CO2 emissions over the coming century. The reason for this is that the transition to less CO2-intensive technologies is increasingly postponed with rising CO2 price uncertainty. By testing different price processes (geometric Brownian motion versus jump processes with different jump frequencies), we can also make useful recommendations concerning the importance of policy predictability. We find that it is better to have climate change policies that are stable over a certain length of time and change abruptly than less abrupt but more frequently changing policies. Less frequent fluctuations reduce the expected value of information and result in smaller cumulative CO2 emissions.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Fleten, Stein-Erik & Maribu, Karl Magnus & Wangensteen, Ivar, 2005.
"Optimal investment strategies in decentralized renewable power generation under uncertainty,"
218, University Library of Munich, Germany, revised Jun 2006.
- Fleten, S.-E. & Maribu, K.M. & Wangensteen, I., 2007. "Optimal investment strategies in decentralized renewable power generation under uncertainty," Energy, Elsevier, vol. 32(5), pages 803-815.
- Tarui, Nori & Polasky, Stephen, 2005. "Environmental regulation with technology adoption, learning and strategic behavior," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 447-467, November.
- Fuss, Sabine & Szolgayova, Jana & Obersteiner, Michael & Gusti, Mykola, 2008. "Investment under market and climate policy uncertainty," Applied Energy, Elsevier, vol. 85(8), pages 708-721, August.
- Laurikka, Harri & Koljonen, Tiina, 2006. "Emissions trading and investment decisions in the power sector--a case study in Finland," Energy Policy, Elsevier, vol. 34(9), pages 1063-1074, June.
- Peck, Stephen C. & Teisberg, Thomas J., 1993. "Global warming uncertainties and the value of information: an analysis using CETA," Resource and Energy Economics, Elsevier, vol. 15(1), pages 71-97, March.
- Luke Reedman & Paul Graham & Peter Coombes, 2006. "Using a Real-Options Approach to Model Technology Adoption Under Carbon Price Uncertainty: An Application to the Australian Electricity Generation Sector," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages S64-S73, 09.
- Alan Manne & Richard Richels, 1992. "Buying Greenhouse Insurance: The Economic Costs of CO2 Emission Limits," MIT Press Books, The MIT Press, edition 1, volume 1, number 026213280x, June.
- Peter S. Reinelt & David W. Keith, 2007. "Carbon Capture Retrofits and the Cost of Regulatory Uncertainty," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 101-128.
- Reinhard Madlener & Gürkan Kumbaroglu & Volkan S. Ediger, 2004.
"Modeling Technology Adoption as an Irreversible Investment Under Uncertainty: The Case of the Turkish Electricity Supply Industry,"
CEPE Working paper series
04-30, CEPE Center for Energy Policy and Economics, ETH Zurich.
- Madlener, Reinhard & Kumbaroglu, Gurkan & Ediger, Volkan S., 2005. "Modeling technology adoption as an irreversible investment under uncertainty: the case of the Turkish electricity supply industry," Energy Economics, Elsevier, vol. 27(1), pages 139-163, January.
- Dieter Helm & Cameron Hepburn & Richard Mash, 2003. "Credible Carbon Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 438-450.
- William D. Nordhaus & David Popp, 1996.
"What is the Value of Scientific Knowledge? An Application to Global Warming Using the PRICE Model,"
Cowles Foundation Discussion Papers
1117, Cowles Foundation for Research in Economics, Yale University.
- William D. Nordhaus & David Popp, 1997. "What is the Value of Scientific Knowledge? An Application to Global Warming Using the PRICE Model," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-45.
- Hlouskova, Jaroslava & Kossmeier, Stephan & Obersteiner, Michael & Schnabl, Alexander, 2005. "Real options and the value of generation capacity in the German electricity market," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 297-310.
- Sir Nicholas Stern, 2006. "What is the Economics of Climate Change?," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(2), pages 1-10, April.
When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:37:y:2009:i:2:p:733-743. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.