Optimizing energy efficiency investments in steel firms: A real options model considering carbon trading and tax cuts during challenging economic conditions

Yuanqi Zhou, Jinqiang Yang and Zhijie Jia

Resources Policy, 2023, vol. 85, issue PA

Abstract: This study proposes a policy mix of carbon pricing and tax cuts to incentivize firms to invest in energy-efficient technology during economic downturns and periods of low carbon prices. Utilizing a real options model, we determine the optimal timing for companies to make investments in energy efficiency technology, taking into account economic changes, carbon prices, and tax cuts. Our case study in China demonstrates that neglecting adverse economic conditions leads to an underestimation of the investment threshold and option value. We find that tax cuts, implemented within the emissions trading system, serve as an effective tool to encourage steel firms to invest in energy efficiency technology in the short to medium term. This supports carbon mitigation efforts, particularly during challenging economic situations. The flexibility of the model allows for analysis of energy efficiency technology in diverse firms and countries, as parameters can be adjusted to suit individual requirements.

Keywords: Climate policy; Tax cuts; Carbon emission trading scheme; Energy efficiency technology; Challenging economic conditions; Real options (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:85:y:2023:i:pa:s0301420723007535

DOI: 10.1016/j.resourpol.2023.104042

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