A real option-based model to valuate CDM projects under uncertain energy policies for emission trading

Taeil Park, Changyoon Kim, Hyoungkwan Kim

Research output: Contribution to journalArticle

21 Citations (Scopus)

Abstract

Emission trading has been considered a primary policy tool for emission reduction. Governments establish national targets for emission reduction and assign emission reduction goals to private entities to accomplish the targets. To attain the goal, private entities should perform offset projects that can produce emission credits or buy emission credits from the market. However, it is not easy for private entities to decide to implement the projects because energy policies associated with emission trading keep changing; thus, the future benefits of the offset projects are quite uncertain. This study presents a real option-based model to investigate how uncertain energy policies affect the financial viability of an offset project. A case study showed that the establishment of a target emission was attractive to the government because it could make the CDM project financially viable with a small amount of government subsidy. In addition, the level of the government subsidy could determine the investment timing for the CDM project. In this context, governments should be cautious in designing energy policies, because even the same energy policies could have different impacts on private entities. Overall, this study is expected to assist private entities in establishing proper investment strategies for CDM projects under uncertain energy policies.

Original languageEnglish
Pages (from-to)288-296
Number of pages9
JournalApplied Energy
Volume131
DOIs
Publication statusPublished - 2014 Oct 15

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emissions trading
Energy policy
energy policy
project
viability
market
emission reduction

All Science Journal Classification (ASJC) codes

  • Building and Construction
  • Energy(all)
  • Mechanical Engineering
  • Management, Monitoring, Policy and Law

Cite this

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A real option-based model to valuate CDM projects under uncertain energy policies for emission trading. / Park, Taeil; Kim, Changyoon; Kim, Hyoungkwan.

In: Applied Energy, Vol. 131, 15.10.2014, p. 288-296.

Research output: Contribution to journalArticle

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