THE DECISION TO INVEST IN EMISSIONS REDUCTION TECHNOLOGIES BASED ON THE REAL OPTIONS APPROACH

摘要

In this paper, we try to illustrate how uncertainty and social costs can influence a firm's decision to invest in emission reduction technology. For a case study, we suppose a firm owing aged coal-fired thermal power plants in US. The firm has option to invest in IGCC (no capture) plant, IGCC capture plant, or NGCC for the substitution of the aged power plants. We calculated numerically the optimal investment behavior subject to stochastic CO_2 emission allowance price, natural gas price, and social cost, using the Bellman equation and lattice models with few variables. The results show that not only CO_2 emission allowance price, and natural gas price but also social costs, and their uncertainty influence the firm's decision to invest in capture plant, especially at an early date. We believe that direct subsidies from government to the firm's capital cost are worthwhile, but social preference that forms the characteristic of the social costs could be a key issue.