Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading

Alexander Brauneis, Michael Loretz, Roland Mestel () and Stefan Palan ()
Additional contact information
Alexander Brauneis: Institute of Financial Management, Alpen-Adria-University Klagenfurt
Michael Loretz: Institute of Banking and Finance, Karl-Franzens-University Graz

No 2011.74, Working Papers from Fondazione Eni Enrico Mattei

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.

Keywords: Carbon price; price floor; technological change; investment decision; real option approach (search for similar items in EconPapers)
JEL-codes: D81 O38 Q55 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-cmp, nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://feem-media.s3.eu-central-1.amazonaws.com/w ... oads/NDL2011-074.pdf (application/pdf)

Related works:
Journal Article: Inducing low-carbon investment in the electric power industry through a price floor for emissions trading (2013)
Working Paper: Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2011.74

Access Statistics for this paper

More papers in Working Papers from Fondazione Eni Enrico Mattei Contact information at EDIRC.
Bibliographic data for series maintained by Alberto Prina Cerai ( this e-mail address is bad, please contact ).