Green investment and asset stranding under transition scenario uncertainty

21 Pages Posted: 11 Jan 2022

See all articles by Maria Flora

Maria Flora

CREST, CNRS, Institut Polytechnique de Paris; CNRS (Centre National de la Recherche Scientifique)

Peter Tankov

ENSAE, Institut Polytechnique de Paris

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2022

Abstract

We develop a real-options approach to evaluate energy assets and potential investment projects under transition scenario uncertainty. Dynamic scenario uncertainty is modelled by assuming that the economic agent acquires the information about the scenario progressively by observing a signal. The problem of valuing an investment is formulated as an American option pricing problem, where the optimal exercise time corresponds to the time of entering into a potential investment project or the time of selling a potentially stranded asset. To illustrate our approach, we apply representative scenarios from integrated assessment models to the examples of a coal-fired power plant without Carbon Capture and Storage (CCS) and potential investment into a biomass power plant with CCS.

Keywords: Transition risk, scenario uncertainty, Bayesian learning, stranded asset, real options

JEL Classification: Q40,Q51

Suggested Citation

Flora, Maria and Tankov, Peter, Green investment and asset stranding under transition scenario uncertainty (January 11, 2022). Available at SSRN: https://ssrn.com/abstract=4006304 or http://dx.doi.org/10.2139/ssrn.4006304

Maria Flora

CREST, CNRS, Institut Polytechnique de Paris ( email )

5 avenue Henry Le Chatelier
Palaiseau, 91764
France

CNRS (Centre National de la Recherche Scientifique) ( email )

Palaiseau
France

Peter Tankov (Contact Author)

ENSAE, Institut Polytechnique de Paris ( email )

Palaiseau
France

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