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

34 Pages Posted: 21 Nov 2011 Last revised: 26 May 2014

See all articles by Alexander Brauneis

Alexander Brauneis

University of Klagenfurt

Roland Mestel

University of Graz

Stefan Palan

University of Graz; University of Innsbruck

Michael Loretz

University of Graz

Multiple version iconThere are 2 versions of this paper

Date Written: November 21, 2011

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 investments 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

JEL Classification: D81, O38, Q55

Suggested Citation

Brauneis, Alexander and Mestel, Roland and Palan, Stefan and Loretz, Michael, Inducing Low-Carbon Investment in the Electric Power Industry Through a Price Floor for Emissions Trading (November 21, 2011). FEEM Working Paper No. 74.2011. Available at SSRN: https://ssrn.com/abstract=1962506 or http://dx.doi.org/10.2139/ssrn.1962506

Alexander Brauneis (Contact Author)

University of Klagenfurt ( email )

Universitaetsstrasse 65-67
Klagenfurt, 9020
Austria
+43 463 2700 4022 (Phone)
+43 463 2700 4092 (Fax)

HOME PAGE: http://www.aau.at/fin

Roland Mestel

University of Graz ( email )

Institute of Banking and Finance
Universitaetsstrasse 15/F2
A-8010 Graz
Austria
+43 316 380 7304 (Phone)
+43 316 380 9580 (Fax)

Stefan Palan

University of Graz ( email )

Universit├Ątsstra├če 15/F2
Graz, 8010
Austria
+433163807306 (Phone)
+433163809580 (Fax)

HOME PAGE: http://academic.palan.biz

University of Innsbruck ( email )

Universitaetsstrasse 15/4
Innsbruck, 6020
Austria
+43512507-2846 (Fax)

HOME PAGE: http://academic.palan.biz

Michael Loretz

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

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