Portfolio Risk Management and Carbon Emissions Valuation in Electric Power

21 Pages Posted: 1 Feb 2010

See all articles by Paul R. Kleindorfer

Paul R. Kleindorfer

University of Pennsylvania - Operations & Information Management Department; Paul Dubrule Professor of Sustainable Development & Distinguished Research Professor at INSEAD

Lide Li

affiliation not provided to SSRN

Date Written: February 1, 2010

Abstract

The energy business is in transition from a cost structure based on fuel and capital to a business that also accounts for the carbon footprint of energy production, transmission and end use. In the European Union (EU), this is already the case, with a liquid and functioning carbon emissions trading market, and with full subscription to the Kyoto Protocol, including use of additionality offsets from projects certified under the Clean Development Mechanism (CDM) and the Joint Implementation (JI) process. Under the cap and trade system implemented in the European Union, and under any of the similar plans envisaged in various bills under discussion in the US Congress, the value of an energy investment will be the joint product of its cash flows (evaluated in the normal fashion) and the implied value/cost of carbon emissions or reductions associated with the investment. Valuation and risk management for energy projects will therefore involve hedging for both energy, inputs and outputs, as well as for carbon outputs. The objective of this paper is to provide an overview of the practicality of extending the normal portfolio problem in electricity supply to encompass the new markets for carbon, and hedging instruments defined on these.

Suggested Citation

Kleindorfer, Paul R. and Li, Lide, Portfolio Risk Management and Carbon Emissions Valuation in Electric Power (February 1, 2010). INSEAD Working Paper No. 2010/05/TOM/ISIC, Available at SSRN: https://ssrn.com/abstract=1545852 or http://dx.doi.org/10.2139/ssrn.1545852

Paul R. Kleindorfer (Contact Author)

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

Paul Dubrule Professor of Sustainable Development & Distinguished Research Professor at INSEAD

Boulevard de Constance
77305 Fontainebleau Cedex
France

Lide Li

affiliation not provided to SSRN

No Address Available

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
283
Abstract Views
3,027
Rank
202,454
PlumX Metrics