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How policy choice affects investment in low-carbon technology: The case of CO2 capture in indirect coal liquefaction in China

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  • Zhou, Wenji
  • Zhu, Bing
  • Chen, Dingjiang
  • Zhao, Fangxian
  • Fei, Weiyang

Abstract

An improved understanding of investment decisions on low-carbon technology will greatly facilitate assessing the effectiveness of carbon emissions mitigation policies. We use the example of implementing CCS (carbon capture and storage) within ICL (indirect coal liquefaction), a controversial technology in China, by constructing a RO (real options) model for the investment decision-making process to assess how different climate policies affect low-carbon technology investors under highly uncertain circumstances. We find that a carbon tax provides the strongest signal for investment and that a market-based measure provides firms with flexibility. Moreover, different types of carbon markets generate substantially different effects on firm behavior, and the CO2 price level exerts a more powerful influence on investors than market volatility or the policy's implementation date. Considering the regional disparities among the coal-abundant but less-developed provinces and the affluent coastal regions in China, we suggest that a sub-national CDM (clean development mechanism) would complete the current domestic policy framework to balance the development requirement and CO2 abatement, whereas extraordinary administrative efforts are necessary to raise the current price of CO2 credits to an effective level, to broaden the carbon market coverage and consolidate the carbon market foundation.

Suggested Citation

  • Zhou, Wenji & Zhu, Bing & Chen, Dingjiang & Zhao, Fangxian & Fei, Weiyang, 2014. "How policy choice affects investment in low-carbon technology: The case of CO2 capture in indirect coal liquefaction in China," Energy, Elsevier, vol. 73(C), pages 670-679.
  • Handle: RePEc:eee:energy:v:73:y:2014:i:c:p:670-679
    DOI: 10.1016/j.energy.2014.06.068
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    Cited by:

    1. Yao, Xing & Zhong, Ping & Zhang, Xian & Zhu, Lei, 2018. "Business model design for the carbon capture utilization and storage (CCUS) project in China," Energy Policy, Elsevier, vol. 121(C), pages 519-533.
    2. Jiaquan Li & Zhifu Mi & Yi-Ming Wei & Jingli Fan & Yang Yang & Yunbing Hou, 2019. "Flexible options to provide energy for capturing carbon dioxide in coal-fired power plants under the Clean Development Mechanism," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 24(8), pages 1483-1505, December.
    3. Zhang, M.M. & Wang, Qunwei & Zhou, Dequn & Ding, H., 2019. "Evaluating uncertain investment decisions in low-carbon transition toward renewable energy," Applied Energy, Elsevier, vol. 240(C), pages 1049-1060.
    4. Scott, Michael J. & Daly, Don S. & Hathaway, John E. & Lansing, Carina S. & Liu, Ying & McJeon, Haewon C. & Moss, Richard H. & Patel, Pralit L. & Peterson, Marty J. & Rice, Jennie S. & Zhou, Yuyu, 2015. "Calculating impacts of energy standards on energy demand in U.S. buildings with uncertainty in an integrated assessment model," Energy, Elsevier, vol. 90(P2), pages 1682-1694.
    5. Boomsma, Trine Krogh & Linnerud, Kristin, 2015. "Market and policy risk under different renewable electricity support schemes," Energy, Elsevier, vol. 89(C), pages 435-448.
    6. Herui Cui & Tian Zhao & Ruirui Wu, 2018. "An Investment Feasibility Analysis of CCS Retrofit Based on a Two-Stage Compound Real Options Model," Energies, MDPI, Open Access Journal, vol. 11(7), pages 1-19, July.
    7. Zhang, M.M. & Zhou, D.Q. & Zhou, P. & Liu, G.Q., 2016. "Optimal feed-in tariff for solar photovoltaic power generation in China: A real options analysis," Energy Policy, Elsevier, vol. 97(C), pages 181-192.
    8. Xiangsheng Dou & Huanying Cui, 2017. "Low-carbon society creation and socio-economic structural transition in China," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 19(5), pages 1577-1599, October.
    9. Zhang, M.M. & Zhou, P. & Zhou, D.Q., 2016. "A real options model for renewable energy investment with application to solar photovoltaic power generation in China," Energy Economics, Elsevier, vol. 59(C), pages 213-226.
    10. Mingming Zhang & Dequn Zhou & Hao Ding & Jingliang Jin, 2016. "Biomass Power Generation Investment in China: A Real Options Evaluation," Sustainability, MDPI, Open Access Journal, vol. 8(6), pages 1-22, June.
    11. Zhang, M.M. & Zhou, D.Q. & Zhou, P. & Chen, H.T., 2017. "Optimal design of subsidy to stimulate renewable energy investments: The case of China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 71(C), pages 873-883.
    12. Linnerud, Kristin & Andersson, Ane Marte & Fleten, Stein-Erik, 2014. "Investment timing under uncertain renewable energy policy: An empirical study of small hydropower projects," Energy, Elsevier, vol. 78(C), pages 154-164.
    13. Jiaquan Li & Yunbing Hou & Pengtao Wang & Bo Yang, 2018. "A Review of Carbon Capture and Storage Project Investment and Operational Decision-Making Based on Bibliometrics," Energies, MDPI, Open Access Journal, vol. 12(1), pages 1-22, December.
    14. He, Senyu & Yin, Jianhua & Zhang, Bin & Wang, Zhaohua, 2018. "How to upgrade an enterprise’s low-carbon technologies under a carbon tax: The trade-off between tax and upgrade fee," Applied Energy, Elsevier, vol. 227(C), pages 564-573.
    15. Zhang, You & Yuan, Zengwei & Margni, Manuele & Bulle, Cécile & Hua, Hui & Jiang, Songyan & Liu, Xuewei, 2019. "Intensive carbon dioxide emission of coal chemical industry in China," Applied Energy, Elsevier, vol. 236(C), pages 540-550.
    16. Zhang, Xinhua & Yang, Hongming & Yu, Qian & Qiu, Jing & Zhang, Yongxi, 2018. "Analysis of carbon-abatement investment for thermal power market in carbon-dispatching mode and policy recommendations," Energy, Elsevier, vol. 149(C), pages 954-966.

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