Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/53215 
Year of Publication: 
2011
Series/Report no.: 
Nota di Lavoro No. 74.2011
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
Abstract: 
Uncertainty about long-term climate policy is a major driving force in the evolution of the carbon market price. Since this price enters the investment decision process of regulated firms, this uncertainty increases the cost of capital for investors and might deter invest-ments into new technologies at the company level. We apply a real options-based approach to assess the impact of climate change policy in the form of a constant or growing price floor on investment decisions of a single firm in a competitive environment. This firm has the opportunity to switch from a high-carbon dirty technology to a low-carbon clean technology. Using Monte Carlo simulation and dynamic programming techniques for real market data, we determine the optimal CO2 price floor level and growth rate in order to induce investments into the low-carbon technology. We show these findings to be robust to a large variety of input parameter settings.
Subjects: 
Carbon price
price floor
technological change
investment decision
real option approach
JEL: 
D81
O38
Q55
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.