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Rate of return requirement for climate versus petroleum projects

Author

Listed:
  • Emhjellen, Magne

    (Petoro)

  • Osmundsen, Petter

    (UiS)

Abstract

Many sosio-economic rates of returns for climate projects have been used in analysing the present value of the climate benefit. However, little attention has been devoted to profitability assessments based on commercial considerations. Economic valuation of climate projects, seen from the perspective of a commercial company, is the subject of this article. In particular, we examine the required rate of return for a project where the uncertainty in the CO2 quota price is the main market uncertainty. We complement the existing climate literature by examining the required rate of return of a climate project in a Capital Asset Pricing Model (CAPM) setting. We find that the CO2 quota price has slightly more systematic risk in the period calculated than the oil price, and estimate the nominal required rate of return for the value of CO2 reduction to be 7.3 percentage points.

Suggested Citation

  • Emhjellen, Magne & Osmundsen, Petter, 2012. "Rate of return requirement for climate versus petroleum projects," UiS Working Papers in Economics and Finance 2012/7, University of Stavanger.
    • Handle: RePEc:hhs:stavef:2012_007
    as

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    File URL: http://dl.dropbox.com/u/8078351/uis_wps_econ_fin/uis_wps_2012_7_emhjellen_osmundsen.pdf
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    References listed on IDEAS

    as
    1. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801, November.
    2. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    3. Osmundsen, Petter & Emhjellen, Magne, 2010. "CCS from the gas-fired power station at Kårstø? A commercial analysis," Energy Policy, Elsevier, vol. 38(12), pages 7818-7826, December.
    4. Gollier, Christian & Weitzman, Martin L., 2010. "How should the distant future be discounted when discount rates are uncertain?," Economics Letters, Elsevier, vol. 107(3), pages 350-353, June.
    5. John Lintner, 1965. "Security Prices, Risk, And Maximal Gains From Diversification," Journal of Finance, American Finance Association, vol. 20(4), pages 587-615, December.
    6. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    7. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
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    Cited by:

    1. Magne Emhjellen & Petter Osmundsen, 2013. "CCS - Failing to Pass Decision Gates," CESifo Working Paper Series 4525, CESifo.
    2. repec:ces:ceswps:_4944 is not listed on IDEAS

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    More about this item

    Keywords

    Climate Projects; Decision Analysis;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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