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Title:Inducing low-carbon investment in the electric power industry through a price floor for emissions trading PDF Logo
Authors:Brauneis, Alexander
Loretz, Michael
Mestel, Roland
Palan, Stefan
Issue Date:2011
Series/Report no.:Nota di lavoro // Fondazione Eni Enrico Mattei: Climate Change and Sustainable Development 74.2011
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
Appears in Collections:FEEM Working Papers, Fondazione Eni Enrico Mattei

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