October 30, 2011

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

by Alexander Brauneis and Michael Loretz

- 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.

Brauneis, A. and M. Loretz (2011). "Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading." FEEM Note di lavoro No. 2011.074, Oct 2011.