IDEAS home Printed from https://ideas.repec.org/a/wly/greenh/v8y2018i5p863-875.html
   My bibliography  Save this article

Optimal design of carbon tax to stimulate CCS investment in China's coal‐fired power plants: A real options analysis

Author

Listed:
  • Xiping Wang
  • Hongdou Zhang

Abstract

Carbon tax is an important policy instrument to control greenhouse gases. How to design a suitable carbon tax rate is of significance for policy makers. This study aims to address this issue from a microeconomic perspective by exploring the decision behavior of a potential investor. A trinomial tree model based on real options theory is presented to evaluate carbon capture and storage (CCS) investment in coal‐fired power plants considering uncertain factors. The model is then applied to a case study and the main findings are as follows: (1) carbon tax policy will have a positive effect on the CCS investment. If the carbon price is not high enough to trigger CCS investment, a hybrid mechanism integrating carbon trading and carbon tax to stimulate CCS investment is required; (2) in applying the trinomial tree real options model, the optimal carbon tax rate should be 145.3 RMB/ton for supercritical pulverized coal (SCPC) (or 79.54 RMB/ton for integrated gasification combined cycle (IGCC)) plants under current market condition and at current technological levels; (3) the optimal carbon tax rate is sensitive to uncertainties. Specifically, the optimal tax rate depends largely on not only the cost of the CCS investment but also the portfolio of carbon price volatility and the initial carbon price level. These conclusions provide the theoretical foundations for decision making regarding CCS investment and related policy making. © 2018 Society of Chemical Industry and John Wiley & Sons, Ltd.

Suggested Citation

  • Xiping Wang & Hongdou Zhang, 2018. "Optimal design of carbon tax to stimulate CCS investment in China's coal‐fired power plants: A real options analysis," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 8(5), pages 863-875, October.
    • Handle: RePEc:wly:greenh:v:8:y:2018:i:5:p:863-875
    DOI: 10.1002/ghg.1814
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/ghg.1814
    Download Restriction: no
    File URL: https://libkey.io/10.1002/ghg.1814?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Zhang, ZhongXiang & Baranzini, Andrea, 2004. "What do we know about carbon taxes? An inquiry into their impacts on competitiveness and distribution of income," Energy Policy, Elsevier, vol. 32(4), pages 507-518, March.
    2. Zhang, Xian & Wang, Xingwei & Chen, Jiajun & Xie, Xi & Wang, Ke & Wei, Yiming, 2014. "A novel modeling based real option approach for CCS investment evaluation under multiple uncertainties," Applied Energy, Elsevier, vol. 113(C), pages 1059-1067.
    3. Lu, Chuanyi & Tong, Qing & Liu, Xuemei, 2010. "The impacts of carbon tax and complementary policies on Chinese economy," Energy Policy, Elsevier, vol. 38(11), pages 7278-7285, November.
    4. Skorek-Osikowska, Anna & Janusz-Szymańska, Katarzyna & Kotowicz, Janusz, 2012. "Modeling and analysis of selected carbon dioxide capture methods in IGCC systems," Energy, Elsevier, vol. 45(1), pages 92-100.
    5. Wu, Ning & Parsons, John E. & Polenske, Karen R., 2013. "The impact of future carbon prices on CCS investment for power generation in China," Energy Policy, Elsevier, vol. 54(C), pages 160-172.
    6. Cormos, Calin-Cristian, 2012. "Integrated assessment of IGCC power generation technology with carbon capture and storage (CCS)," Energy, Elsevier, vol. 42(1), pages 434-445.
    7. Chiu, Fan-Ping & Kuo, Hsiao-I. & Chen, Chi-Chung & Hsu, Chia-Sheng, 2015. "The energy price equivalence of carbon taxes and emissions trading—Theory and evidence," Applied Energy, Elsevier, vol. 160(C), pages 164-171.
    8. Zhou, Wenji & Zhu, Bing & Fuss, Sabine & Szolgayová, Jana & Obersteiner, Michael & Fei, Weiyang, 2010. "Uncertainty modeling of CCS investment strategy in China's power sector," Applied Energy, Elsevier, vol. 87(7), pages 2392-2400, July.
    9. Telsnig, Thomas & Tomaschek, Jan & Özdemir, Enver Doruk & Bruchof, David & Fahl, Ulrich & Eltrop, Ludger, 2013. "Assessment of selected CCS technologies in electricity and synthetic fuel production for CO2 mitigation in South Africa," Energy Policy, Elsevier, vol. 63(C), pages 168-180.
    10. Zhu, Lei & Fan, Ying, 2013. "Modelling the investment in carbon capture retrofits of pulverized coal-fired plants," Energy, Elsevier, vol. 57(C), pages 66-75.
    11. Zhu, Lei & Fan, Ying, 2011. "A real options–based CCS investment evaluation model: Case study of China’s power generation sector," Applied Energy, Elsevier, vol. 88(12), pages 4320-4333.
    12. Sugino, Makoto & Arimura, Toshi H. & Morgenstern, Richard D., 2013. "The effects of alternative carbon mitigation policies on Japanese industries," Energy Policy, Elsevier, vol. 62(C), pages 1254-1267.
    13. Somayeh Heydari & Nick Ovenden & Afzal Siddiqui, 2012. "Real options analysis of investment in carbon capture and sequestration technology," Computational Management Science, Springer, vol. 9(1), pages 109-138, February.
    14. Fuss, Sabine & Szolgayová, Jana, 2010. "Fuel price and technological uncertainty in a real options model for electricity planning," Applied Energy, Elsevier, vol. 87(9), pages 2938-2944, September.
    15. Can Wang & Yuan Yang & Junjie Zhang, 2015. "China's sectoral strategies in energy conservation and carbon mitigation," Climate Policy, Taylor & Francis Journals, vol. 15(sup1), pages 60-80, December.
    16. Tola, Vittorio & Pettinau, Alberto, 2014. "Power generation plants with carbon capture and storage: A techno-economic comparison between coal combustion and gasification technologies," Applied Energy, Elsevier, vol. 113(C), pages 1461-1474.
    17. 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.
    18. Crossland, Jarrod & Li, Bin & Roca, Eduardo, 2013. "Is the European Union Emissions Trading Scheme (EU ETS) informationally efficient? Evidence from momentum-based trading strategies," Applied Energy, Elsevier, vol. 109(C), pages 10-23.
    19. Shin, Jungwoo & Lee, Chul-Yong & Kim, Hongbum, 2016. "Technology and demand forecasting for carbon capture and storage technology in South Korea," Energy Policy, Elsevier, vol. 98(C), pages 1-11.
    20. Abadie, Luis M. & Chamorro, José M., 2008. "European CO2 prices and carbon capture investments," Energy Economics, Elsevier, vol. 30(6), pages 2992-3015, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Qing Tong & Sheng Zhou & Yuefeng Guo & Yang Zhang & Xinyang Wei, 2019. "Forecast and Analysis on Reducing China’s CO 2 Emissions from Lime Industrial Process," IJERPH, MDPI, vol. 16(3), pages 1-17, February.
    2. Weiwei Zhang & Tianci Qing, 2022. "The effects of policy subsidy on the investment decisions of carbon capture and storage—A real‐options approach," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 12(6), pages 698-711, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xiping Wang & Hongdou Zhang, 2018. "Valuation of CCS investment in China's coal‐fired power plants based on a compound real options model," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 8(5), pages 978-988, October.
    2. 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, vol. 11(7), pages 1-19, July.
    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. Xiping Wang & Shaoyuan Qie, 2018. "Study on the investment timing of carbon capture and storage under different business modes," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 8(4), pages 639-649, August.
    5. 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.
    6. 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.
    7. Fan, Jing-Li & Xu, Mao & Yang, Lin & Zhang, Xian & Li, Fengyu, 2019. "How can carbon capture utilization and storage be incentivized in China? A perspective based on the 45Q tax credit provisions," Energy Policy, Elsevier, vol. 132(C), pages 1229-1240.
    8. Thomas Aspinall & Adrian Gepp & Geoff Harris & Simone Kelly & Colette Southam & Bruce Vanstone, 2021. "Estimation of a term structure model of carbon prices through state space methods: The European Union emissions trading scheme," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3797-3819, June.
    9. Zhu, Lei & Fan, Ying, 2013. "Modelling the investment in carbon capture retrofits of pulverized coal-fired plants," Energy, Elsevier, vol. 57(C), pages 66-75.
    10. 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.
    11. Mingming Zhang & Dequn Zhou & Hao Ding & Jingliang Jin, 2016. "Biomass Power Generation Investment in China: A Real Options Evaluation," Sustainability, MDPI, vol. 8(6), pages 1-22, June.
    12. Zhang, Xinhua & Gan, Dongmei & Wang, Yali & Liu, Yu & Ge, Jiali & Xie, Rui, 2020. "The impact of price and revenue floors on carbon emission reduction investment by coal-fired power plants," Technological Forecasting and Social Change, Elsevier, vol. 154(C).
    13. Lei Zhu & Xin Liu, 2015. "Promoting the Carbon Removal in Coal Utilization-A Benefit-Risk Analysis among Full-Chain Carbon Capture and Utilization Project," Energy & Environment, , vol. 26(6-7), pages 1035-1053, November.
    14. Wang, Xingwei & Cai, Yanpeng & Dai, Chao, 2014. "Evaluating China's biomass power production investment based on a policy benefit real options model," Energy, Elsevier, vol. 73(C), pages 751-761.
    15. 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.
    16. Ouyang, Yiling & Guo, Jian, 2022. "Carbon capture and storage investment strategy towards the dual carbon goals," Journal of Asian Economics, Elsevier, vol. 82(C).
    17. Fan, Jing-Li & Xu, Mao & Yang, Lin & Zhang, Xian, 2019. "Benefit evaluation of investment in CCS retrofitting of coal-fired power plants and PV power plants in China based on real options," Renewable and Sustainable Energy Reviews, Elsevier, vol. 115(C).
    18. Fan, Jing-Li & Xu, Mao & Li, Fengyu & Yang, Lin & Zhang, Xian, 2018. "Carbon capture and storage (CCS) retrofit potential of coal-fired power plants in China: The technology lock-in and cost optimization perspective," Applied Energy, Elsevier, vol. 229(C), pages 326-334.
    19. Zhang, Xian & Wang, Xingwei & Chen, Jiajun & Xie, Xi & Wang, Ke & Wei, Yiming, 2014. "A novel modeling based real option approach for CCS investment evaluation under multiple uncertainties," Applied Energy, Elsevier, vol. 113(C), pages 1059-1067.
    20. Knoope, M.M.J. & Ramírez, A. & Faaij, A.P.C., 2015. "The influence of uncertainty in the development of a CO2 infrastructure network," Applied Energy, Elsevier, vol. 158(C), pages 332-347.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:greenh:v:8:y:2018:i:5:p:863-875. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)2152-3878 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.