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Delaying the introduction of emissions trading systems—Implications for power plant investment and operation from a multi-stage decision model

Author

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  • Jian-Lei Mo

    (Center for Energy and Environmental Policy Research, Center for Energy and Environmental Policy Research, Institute of Policy and Management - CAS - Chinese Academy of Sciences [Changchun Branch])

  • Joachim Schleich

    (Fraunhofer Institute for Systems and Innovation Research - Fraunhofer Institute for Systems and Innovation Research, Virginia Polytechnic Institute and State University [Blacksburg], MTS - Management Technologique et Strategique - Grenoble École de Management (GEM))

  • Lei Zhu

    (University of Toronto)

  • Ying Fan

    (School of Economics & Management - Beihang University)

Abstract

Relying on real options theory, we employ a multistage decision model to analyze the effect of delaying the introduction of emission trading systems (ETS) on power plant investments in carbon capture and storage (CCS) retrofits, on plant operation, and on carbon dioxide (CO2) abatement. Unlike previous studies, we assume that the investment decision is made before the ETS is in place, and we allow CCS operating flexibility for new power plant investments. Thus, the plant may be run in CCS-off mode if carbon prices are low. We employ Monte Carlo simulation methods to account for uncertainties in the prices of CO2 certificates, other inputs, and output prices, relying on a realistic parameterization for a supercritical pulverized coal plant in China. We find that CCS operating flexibility lowers the critical carbon price needed to support CCS investment because it renders CCS investment less irreversible. For a low carbon price path, operating flexibility also implies that delaying the introduction of an ETS hardly affects plant CO2 abatement since the plant operator is better off purchasing emission certificates rather than operating the plant in CCS mode. Interestingly, for low carbon prices we find a U-shaped relation between the length of the delay and the economic value of the plant. Thus, delaying the introduction of an ETS may make investors worse off.

Suggested Citation

  • Jian-Lei Mo & Joachim Schleich & Lei Zhu & Ying Fan, 2015. "Delaying the introduction of emissions trading systems—Implications for power plant investment and operation from a multi-stage decision model," Grenoble Ecole de Management (Post-Print) hal-01265934, HAL.
  • Handle: RePEc:hal:gemptp:hal-01265934
    DOI: 10.1016/j.eneco.2015.11.009
    Note: View the original document on HAL open archive server: http://hal.grenoble-em.com/hal-01265934
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    References listed on IDEAS

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    1. repec:eee:energy:v:151:y:2018:i:c:p:211-225 is not listed on IDEAS
    2. repec:eee:eneeco:v:70:y:2018:i:c:p:45-60 is not listed on IDEAS

    More about this item

    Keywords

    power plant investment; regulatory uncertainty; multistage decision; operating flexibility; real options theory; emissions trading; CCS; China;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G3 - Financial Economics - - Corporate Finance and Governance
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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