Transition from coal to natural gas power plants under CO_2 consideration: a real options approach

摘要

As a way to alleviate global warming, there have been major initiatives to reduce carbon dioxide (CO_(2)) emission amount across the world. In Western Europe as well as in California, market-based permits for CO_(2)emission have been a major enabler of such initiatives. In this paper, under the assumption of such market-based permits where permit price is inherently uncertain, we model and analyse a transition process from coal-based to natural gas-based power plants with less CO_(2)emission based on a real options approach. Specifically, we apply existing real options approach to derive closed-form analytical solutions for such a transition. Subsequent managerial insights and policy implications are provided in the context of CO_(2)emission reduction and environmental ramifications.