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A real option-based model for promoting sustainable energy projects under the clean development mechanism

Author

Listed:
  • Lee, Hyounkyu
  • Park, Taeil
  • Kim, Byungil
  • Kim, Kyeongseok
  • Kim, Hyoungkwan

Abstract

The clean development mechanism (CDM) provides a way of assisting sustainable development in developing countries for developed countries to reduce greenhouse gas (GHG) emissions. Despite its intended benefits, the primary CDM market decreased from US$5.8 billion in 2006 to US$1.5 billion in 2010. One of the primary reasons for the reduction of market size is that developed countries as investors have a high level of risks caused by the volatility of the market price for certified emission reductions (CERs). Another issue to be resolved is that developing countries as host countries cannot claim any right to the CERs produced on their own land. This paper presents a real option-based model for both parties (developed and developing countries) to have their fair share of profits and risks by controlling the uncertainty associated with the future value of CERs. A case study illustrated that the proposed model can effectively attract investors to CDM projects leading to mitigation of climate change.

Suggested Citation

  • Lee, Hyounkyu & Park, Taeil & Kim, Byungil & Kim, Kyeongseok & Kim, Hyoungkwan, 2013. "A real option-based model for promoting sustainable energy projects under the clean development mechanism," Energy Policy, Elsevier, vol. 54(C), pages 360-368.
  • Handle: RePEc:eee:enepol:v:54:y:2013:i:c:p:360-368
    DOI: 10.1016/j.enpol.2012.11.050
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "AplicaciĆ³n de las opciones reales en la toma de decisiones en los mercados de electricidad," ESTUDIOS GERENCIALES, UNIVERSIDAD ICESI, November.
    2. Mandaloufas, Melissa & Lamas, Wendell de Queiroz & Brown, Scott & Irizarry Quintero, Anamari, 2015. "Energy balance analysis of the Brazilian alcohol for flex fuel production," Renewable and Sustainable Energy Reviews, Elsevier, vol. 43(C), pages 403-414.
    3. repec:eee:rensus:v:75:y:2017:i:c:p:918-926 is not listed on IDEAS
    4. Carmichael, David G. & Ballouz, Joseph J. & Balatbat, Maria C.A., 2015. "Improving the attractiveness of CDM projects through allowing and incorporating options," Energy Policy, Elsevier, vol. 86(C), pages 784-791.

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