IDEAS home Printed from https://ideas.repec.org/a/bla/ecorec/v82y2006is1ps64-s73.html
   My bibliography  Save this article

Using a Real‐Options Approach to Model Technology Adoption Under Carbon Price Uncertainty: An Application to the Australian Electricity Generation Sector

Author

Listed:
  • LUKE REEDMAN
  • PAUL GRAHAM
  • PETER COOMBES

Abstract

The present climate for investment in electricity generation assets in Australia is uncertain. We develop a real‐options model to contrast the timing of the uptake of various electricity generation technologies under two carbon tax simulations: when a carbon tax of known size commences at a certain date in the future; and a carbon tax of known size commences at an uncertain date in the future. We find that uptake in the future varies significantly depending upon an investor's view of uncertainty and whether the technology is primarily designed to be viable in a market with or without carbon taxes.

Suggested Citation

  • Luke Reedman & Paul Graham & Peter Coombes, 2006. "Using a Real‐Options Approach to Model Technology Adoption Under Carbon Price Uncertainty: An Application to the Australian Electricity Generation Sector," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages 64-73, September.
    • Handle: RePEc:bla:ecorec:v:82:y:2006:i:s1:p:s64-s73
    DOI: 10.1111/j.1475-4932.2006.00333.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1475-4932.2006.00333.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1475-4932.2006.00333.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. repec:bla:ausecr:v:37:y:2004:i:3:p:287-303 is not listed on IDEAS
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Graham, Paul W. & Williams, David J., 2003. "Optimal technological choices in meeting Australian energy policy goals," Energy Economics, Elsevier, vol. 25(6), pages 691-712, November.
    4. Simshauser, Paul & Doan, Thao & Lacey, Ben, 2007. "The Outlook for the Economic and Environmental Performance of Australia's National Electricity Market in 2030," The Electricity Journal, Elsevier, vol. 20(6), pages 58-75, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hayward, Jennifer A. & Graham, Paul W., 2013. "A global and local endogenous experience curve model for projecting future uptake and cost of electricity generation technologies," Energy Economics, Elsevier, vol. 40(C), pages 537-548.
    2. Pahle, Michael & Fan, Lin & Schill, Wolf-Peter, 2011. "How Emission Certificate Allocations Distort Fossil Investments: The German Example," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 39(4), pages 1975-1987.
    3. Fan, Jing-Li & Xu, Mao & Yang, Lin & Zhang, Xian & Li, Fengyu, 2019. "How can carbon capture utilization and storage be incentivized in China? A perspective based on the 45Q tax credit provisions," Energy Policy, Elsevier, vol. 132(C), pages 1229-1240.
    4. Lambie, Neil Ross, 2010. "Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(2), pages 1-15.
    5. Hazra, Tanmoy & Samanta, Biswajit & Dey, Kaushik, 2019. "Real option valuation of an Indian iron ore deposit through system dynamics model," Resources Policy, Elsevier, vol. 60(C), pages 288-299.
    6. Liu, Shen & Colson, Gregory & Wetzstein, Michael, 2018. "Biodiesel investment in a disruptive tax-credit policy environment," Energy Policy, Elsevier, vol. 123(C), pages 19-30.
    7. Fuss, Sabine & Szolgayova, Jana & Obersteiner, Michael & Gusti, Mykola, 2008. "Investment under market and climate policy uncertainty," Applied Energy, Elsevier, vol. 85(8), pages 708-721, August.
    8. Blyth, William & Bunn, Derek & Kettunen, Janne & Wilson, Tom, 2009. "Policy interactions, risk and price formation in carbon markets," Energy Policy, Elsevier, vol. 37(12), pages 5192-5207, December.
    9. Janne Kettunen, Derek W. Bunn and William Blyth & Derek W. Bunn & William Blyth, 2011. "Investment Propensities under Carbon Policy Uncertainty," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 77-118.
    10. Koomey, Jonathan & Hultman, Nathan E., 2007. "A reactor-level analysis of busbar costs for US nuclear plants, 1970-2005," Energy Policy, Elsevier, vol. 35(11), pages 5630-5642, November.
    11. Szolgayova, Jana & Fuss, Sabine & Obersteiner, Michael, 2008. "Assessing the effects of CO2 price caps on electricity investments--A real options analysis," Energy Policy, Elsevier, vol. 36(10), pages 3974-3981, October.
    12. Rustico, Erica & Dimitrov, Stanko, 2022. "Environmental taxation: The impact of carbon tax policy commitment on technology choice and social welfare," International Journal of Production Economics, Elsevier, vol. 243(C).
    13. Fuss, Sabine & Johansson, Daniel J.A. & Szolgayova, Jana & Obersteiner, Michael, 2009. "Impact of climate policy uncertainty on the adoption of electricity generating technologies," Energy Policy, Elsevier, vol. 37(2), pages 733-743, February.
    14. Romano, Teresa & Fumagalli, Elena, 2018. "Greening the power generation sector: Understanding the role of uncertainty," Renewable and Sustainable Energy Reviews, Elsevier, vol. 91(C), pages 272-286.
    15. Kann, Shayle, 2009. "Overcoming barriers to wind project finance in Australia," Energy Policy, Elsevier, vol. 37(8), pages 3139-3148, August.
    16. Blyth, William & Bradley, Richard & Bunn, Derek & Clarke, Charlie & Wilson, Tom & Yang, Ming, 2007. "Investment risks under uncertain climate change policy," Energy Policy, Elsevier, vol. 35(11), pages 5766-5773, November.
    17. Fan, Jing-Li & Xu, Mao & Yang, Lin & Zhang, Xian, 2019. "Benefit evaluation of investment in CCS retrofitting of coal-fired power plants and PV power plants in China based on real options," Renewable and Sustainable Energy Reviews, Elsevier, vol. 115(C).
    18. Shahnazari, Mahdi & McHugh, Adam & Maybee, Bryan & Whale, Jonathan, 2014. "Evaluation of power investment decisions under uncertain carbon policy: A case study for converting coal fired steam turbine to combined cycle gas turbine plants in Australia," Applied Energy, Elsevier, vol. 118(C), pages 271-279.
    19. ShahNazari, Mahdi & McHugh, Adam & Maybee, Bryan & Whale, Jonathan, 2014. "The effect of political cycles on power investment decisions: Expectations over the repeal and reinstatement of carbon policy mechanisms in Australia," Applied Energy, Elsevier, vol. 130(C), pages 157-165.
    20. Kim, Wook & Chattopadhyay, Deb & Park, Jong-bae, 2010. "Impact of carbon cost on wholesale electricity price: A note on price pass-through issues," Energy, Elsevier, vol. 35(8), pages 3441-3448.
    21. Abadie, Luis M. & Chamorro, José M., 2008. "European CO2 prices and carbon capture investments," Energy Economics, Elsevier, vol. 30(6), pages 2992-3015, November.
    22. Milstein, Irena & Tishler, Asher, 2011. "Intermittently renewable energy, optimal capacity mix and prices in a deregulated electricity market," Energy Policy, Elsevier, vol. 39(7), pages 3922-3927, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fouilloux, Jessica & Moraux, Franck & Viviani, Jean-Laurent, 2015. "Investing in finite-life carbon emissions reduction program under risk and idiosyncratic uncertainty," Energy Policy, Elsevier, vol. 82(C), pages 310-320.
    2. Ben Abdallah, Skander & Lasserre, Pierre, 2016. "Asset retirement with infinitely repeated alternative replacements: Harvest age and species choice in forestry," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 144-164.
    3. Oscar Gutiérrez & Francisco Ruiz-Aliseda, 2011. "Real options with unknown-date events," Annals of Finance, Springer, vol. 7(2), pages 171-198, May.
    4. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    5. Arve, Malin & Zwart, Gijsbert, 2023. "Optimal procurement and investment in new technologies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    6. Shively, Gerald E., 2001. "Price thresholds, price volatility, and the private costs of investment in a developing country grain market," Economic Modelling, Elsevier, vol. 18(3), pages 399-414, August.
    7. Marks, Phillipa & Marks, Brian, 2007. "Spectrum Allocation, Spectrum Commons and Public Goods: the Role of the Market," MPRA Paper 6785, University Library of Munich, Germany.
    8. Stern, Nicholas, 2018. "Public economics as if time matters: Climate change and the dynamics of policy," Journal of Public Economics, Elsevier, vol. 162(C), pages 4-17.
    9. Krause, M.U., 2002. "Inter-Industry Wage Differentials and Job Flows," Discussion Paper 2002-3, Tilburg University, Center for Economic Research.
    10. Wong, Kit Pong & Yi, Long, 2013. "Irreversibility, mean reversion, and investment timing," Economic Modelling, Elsevier, vol. 30(C), pages 770-775.
    11. Pierre‐Richard Agénor, 2004. "Macroeconomic Adjustment and the Poor: Analytical Issues and Cross‐Country Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 351-408, July.
    12. Atal, Vidya & Bar, Talia & Gordon, Sidartha, 2016. "Project selection: Commitment and competition," Games and Economic Behavior, Elsevier, vol. 96(C), pages 30-48.
    13. Yonggu Kim & Keeyoung Shin & Joseph Ahn & Eul-Bum Lee, 2017. "Probabilistic Cash Flow-Based Optimal Investment Timing Using Two-Color Rainbow Options Valuation for Economic Sustainability Appraisement," Sustainability, MDPI, vol. 9(10), pages 1-16, October.
    14. Bergendahl, Goran, 2005. "Models for investment in electronic commerce--financial perspectives with empirical evidence," Omega, Elsevier, vol. 33(4), pages 363-376, August.
    15. Prelipcean, Gabriela & Boscoianu, Mircea, 2019. "Aspect Regarding the Design of Active Strategies for Venture Capital Financing – the Flexible Adjustment for Romania as a Frontier Capital Market," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2019), Rovinj, Croatia, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Rovinj, Croatia, 12-14 September 2019, pages 187-196, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.
    16. Wong, Kit Pong, 2011. "Progressive taxation and the intensity and timing of investment," Economic Modelling, Elsevier, vol. 28(1-2), pages 100-108, January.
    17. Chahim, M. & Hartl, R.F. & Kort, P.M., 2011. "The Deterministic Impulse Control Maximum Principle in Operations Research : Necessary and Sufficient Optimality Conditions (replaces CentER DP 2011-052)," Discussion Paper 2011-133, Tilburg University, Center for Economic Research.
    18. Unterschultz, James R., 2000. "New Instruments For Co-Ordination And Risk Sharing Within The Canadian Beef Industry," Project Report Series 24046, University of Alberta, Department of Resource Economics and Environmental Sociology.
    19. Waters, James, 2015. "Optimal design and consequences of financial disclosure regulation: a real options approach," MPRA Paper 63369, University Library of Munich, Germany.
    20. Meade, Richard, 2006. "Valuing the Impact of Climate Change Policies on Forestry," Working Paper Series 19068, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecorec:v:82:y:2006:i:s1:p:s64-s73. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/esausea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.