Project Valuation in Climate Crisis

Sandra Dow () and Yuwei Shi ()
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Sandra Dow: Middlebury Institute of International Studies at Monterey
Yuwei Shi: University of California at Santa Cruz

Chapter Chapter 11 in Corporate Finance Under Climate Crisis, 2025, pp 281-317 from Springer

Abstract: Abstract This chapter explores the evolving landscape of capital budgeting in the context of climate change, emphasizing the integration of climate risks and opportunities into traditional project valuation techniques. It highlights the inadequacies of conventional methods such as PaybackPayback Period and IRRInternal Rate of Return (IRR) in addressing the long-term uncertainties of climate-sensitive investments. The chapter introduces advanced tools, including Levelized Cost of ElectricityLevelized Cost of Electricity (LCOE) (LCOE), Net Present ValueNet Present Value (NPV) (NPV), Shadow Pricing, and Real Options Analysis (ROA), to account for climate-related complexities. Through detailed case studies, such as Evergreen Wind Farm and Granite Peak Mine, the chapter illustrates how these tools are applied in real-world scenarios. LCOELevelized Cost of Electricity (LCOE) is presented as a critical metric for comparing renewable and fossil fuel-based projects, while Shadow Pricing incorporates carbon costs to align investments with regulatory trends. ROA demonstrates the value of flexibility in decision-making, enabling firms to defer, expand, or abandon projects based on changing conditions.”

Keywords: Climate-Sensitive Capital Budgeting; Levelized Cost of Electricity (LCOE); Shadow Carbon Pricing; Real Options Analysis (ROA); Carbon Pricing in Investment Decisions; Project Valuation under Climate Risk; Renewable Energy Financial Analysis; Net Present Value (NPV) for Green Projects; Coal Mine Stranded Assets; Flexibility in Climate Project Investments (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-83487-5_11

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DOI: 10.1007/978-3-031-83487-5_11

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