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Real Option Valuation of the R&D Investment in Renewable Energy Considering the Effects of the Carbon Emission Trading Market: A Korean Case

Author

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  • Kyung-Taek Kim

    (R&D Strategy Division, Korea Institute of Energy Research, Daejeon 34129, Korea)

  • Deok-Joo Lee

    (Department of Industrial Engineering, Seoul National University, Seoul 08826, Korea)

  • Donghyun An

    (Department of Industrial Engineering, Seoul National University, Seoul 08826, Korea)

Abstract

A carbon market was introduced for the first time in January 2005, when the EU assigned carbon emission allowances to approximately 15,000 enterprises in 25 countries and established a market for emissions trading. In Korea, the carbon emission trading system started from January 2015 with three phases running up to 2025. As many countries have introduced carbon markets, new evaluation models that consider not only fossil energy prices but also carbon emission costs are necessary because additional costs of using fossil energy might have been incurred due to carbon emissions. The purpose of this paper is to develop a real option model that considers not only the uncertainty of existing fossil energy prices, but also the uncertainty of carbon emission rights prices, in evaluating the economic value of renewable energy R&D. Using the real option model, we attempted to assess the effects of the uncertainty of newly appearing carbon markets on the economic value of renewable energy R&D in Korea empirically. Furthermore, we derived an optimal decision path according to the uncertain future situations of fossil energy and carbon markets by analyzing a trinomial lattice model in which the optimal timings of R&D and deployment are identified.

Suggested Citation

  • Kyung-Taek Kim & Deok-Joo Lee & Donghyun An, 2020. "Real Option Valuation of the R&D Investment in Renewable Energy Considering the Effects of the Carbon Emission Trading Market: A Korean Case," Energies, MDPI, vol. 13(3), pages 1-17, February.
    • Handle: RePEc:gam:jeners:v:13:y:2020:i:3:p:622-:d:315352
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    References listed on IDEAS

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    2. Shu, Haicheng & Wang, Yu & Umar, Muhammad & Zhong, Yifan, 2023. "Dynamics of renewable energy research, investment in EnvoTech and environmental quality in the context of G7 countries," Energy Economics, Elsevier, vol. 120(C).
    3. Liu, Yue & Sun, Huaping & Meng, Bo & Jin, Shunlin & Chen, Bin, 2023. "How to purchase carbon emission right optimally for energy-consuming enterprises? Analysis based on optimal stopping model," Energy Economics, Elsevier, vol. 124(C).
    4. Zhai, Dongsheng & Zhang, Tianrui & Liang, Guoqiang & Liu, Baoliu, 2024. "Quantum carbon finance: Carbon emission rights option pricing and investment decision," Energy Economics, Elsevier, vol. 134(C).
    5. Shenhai Huang & Chao Du & Xian Jin & Daini Zhang & Shiyan Wen & Zhijie Jia, 2023. "The Impact of Carbon Emission Trading on Renewable Energy: A Comparative Analysis Based on the CGE Model," Sustainability, MDPI, vol. 15(16), pages 1-16, August.

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