Long Term Dynamics in CO2 Allowance Prices and Carbon Capture Investments

Luis María Abadie and Jose Chamorro

No 6418, IKERLANAK from Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I

Abstract: In this paper we analyse the behaviour of the EU market for CO2 emission allowances; specifically, we focus on the contracts maturing in the Kyoto Protocol's second period of application (2008 to 2012). We calibrate the underlying parameters for the allowance price in the long run and we also calibrate those from the Spanish wholesale electricity market. This information is then used to assess the option to install a carbon capture and storage (CCS) unit in a coal-fired power plant. We use a two-dimensional binomial lattice where costs and profits are valued and the optimal investment time is determined. In other words, we study the trigger allowance prices above which it is optimal to install the capture unit immediately. We further analyse the impact of several variables on the critical prices, among them allowance price volatility and a hypothetical government subsidy. We conclude that, at current permit prices, from a financial point of view, immediate installation does not seem justified. This need not be the case, though, if carbon market parameters change dramatically and/or a specific policy to promote these units is adopted.

Keywords: power plants; European Trading Scheme; Kalman filter; carbon capture and storage (search for similar items in EconPapers)
Date: 2007-05
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ehu:ikerla:6418

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Dpto. de Fundamentos del Análisis Económico I, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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